[2024] KETAT 346 (KLR)

Mumias Sugar Company Limited v Commissioner of Domestic Taxes (Tax Appeal 778 of 2021) [2024] KETAT 346 (KLR) (8 March 2024) (Judgment)

Neutral citation: [2024] KETAT 346 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 778 of 2021

E.N Wafula, Chair, RO Oluoch, AK Kiprotich, Cynthia B. Mayaka & T Vikiru, Members

March 8, 2024

Between

Mumias Sugar Company Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability Company with its principal business being in the sugar industry.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority (KRA) Act, and KRA is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent issued Assessments Orders online on 15th November 2019. The Respondent vide an online demand notice dated 10th June 2021 gave the Appellant 14 days to pay outstanding taxes.

4. The Appellant lodged an objection to the demand notice vide a letter dated 8th July 2021.

5. The Respondent replied to the Appellant’s letter of 8th July 2021 vide an email communication dated 22nd July 2021.

6. The Respondent wrote to the Appellant vide a letter dated 15th October 2021 and forwarded the same vide an email dated 18th October 2021.

7. Dissatisfied with the Respondent’s letter of 15th October 2021, the Appellant lodged a Notice of Appeal dated 16th November 2021 and filed on 17th November 2021.

The Appeal 8. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated and filed on 1st December, 2021:-a.The Respondent erred in law in imposing and or demanding VAT and PAYE on the Appellant for the period falling prior to the 12 months preceding the date the Appellant was placed under receivership.b.The Respondent erred in law and fact in finding that the Appellant's notice of objection was made out of the statutory timelines and without an application for late objection.c.The Respondent erred in fact and law by failing to consider the legal status of the Appellant being under receivership since 2019 in the assessment of the taxes.d.The Respondent erred in law and fact in imposing VAT and PAYE on the Appellant without giving due regard to considerations and restrictions set out under Section 311(5) and Section 95(1) of the Companies Act (Cap 486) (repealed).e.Without prejudice to the foregoing grounds, the Respondent erred in law in failing to consider that the taxes in question are not payable by virtue of Section 311(1) of the Companies Act (Cap 486) (repealed).f.There is no VAT liability for the one year period preceding the receivership. The VAT amounts demanded by the Respondent are not lawfully due.g.The PAYE in question is not payable in toto considering that the Appellant had been in financial distress during the year preceding receivership and consequently only retained skeleton staff and no salaries were paid to the said employees.h.The Respondent did not communicate its decision to the Appellant's notice of objection within the statutory time limits. As a result, the Appellant's notice of objection was allowed by operation of the law. The Respondent erred in law in making further demands for VAT and PAYE despite the notice of objection being allowed under Section 51(11) of the Tax Procedures Act.i.The tax demand, enforcement and or collection against the Appellant is contrary to Section 560 of the Insolvency Act, 2015.

Appellant’s Case 9. Appellant’s case is premised on the hereunder filed documents and proceedings before the Tribunal:-i.The Appellant’s Statement of Facts dated 1st December, 2021 and filed on the same date together with the documents attached thereto.ii.Appellant’s submissions dated 86h September 2023 and filed on 7th September 2023.

10. The Appellant submitted that it experienced serious financial distress for several past years which led to the milling of sugar and other production operations to slow down and finally complete shut-down in 2017. That the Appellant could not meet its financial obligation to creditors. Also that the Appellant could not sustain its workforce and the employees went without pay. That subsequently, the unsecured creditors moved to the High Court and filed winding-up petitions to liquidate the Appellant.

11. The Appellant stated that it was placed under receivership by Kenya Commercial Bank Limited (KCB) on 20th September 2019 and Mr. Ponangipalli Venkata Ramana Rao appointed as Receiver Manager. That the Appellant has remained under receivership since. That worth noting, is numerous court cases that have prevented the revival of the Appellant.

12. That on 10th June 2021, the Respondent issued a 14-day demand notice demanding payment of Kshs 7,321,975,227. 8 being Value Added Tax and Pay As You Earn all-inclusive purportedly owing for the period 1st October 2013 to 31st January 2019.

13. The Appellant posited that the Respondent in its confirmation of assessment contended that the VAT additional assessment was raised under the VAT Auto Assessment (VAA) Kshs 24,286,844. 16 as a result of inconsistencies on purchases claimed while Kshs 4,996,805,212 was on account of self-assessment and thus the same is outstanding debt and cannot be objected to under the purview of Section 51 of the Tax Procedures Act.

14. That the Respondent alleged that the PAYE of Kshs 24,286,844. 16 was on account of self-assessment filed by the Appellant and thus the same cannot be objected to.

15. That the Respondent also contended that the notice of objection was lodged out of time without an application for a late objection contrary to Section 51(7) of the Tax Procedures Act.

16. According to the Appellant, it objected to the assessment by the Respondent on VAT and PAYE on grounds of irregular assessment in disregard to its legal status being under receivership pursuant to the repealed Companies Act (Cap 486) (the Act) by way of transitional and saving provisions in the Insolvency Act 2015.

17. That Section 733(2) of the Insolvency Act provides that despite the repeal of the Companies Act or of parts of Part VI to IX of that Act, those parts, and any other provisions of that Act necessary for the operation, continue to apply, to the exclusion of the Insolvency Act, to any past event or to any step or proceeding, following, or relating to that past event, even if it is a step or proceeding that is taken after the commencement of the Insolvency Act. That accordingly, Sections 311 and 95 of the Companies Act Cap 486(repealed) are applicable to this Appeal.

18. The Appellant emphasized that it was placed under receivership on 20th September 2019 and by dint of Sections 311 and 95 of Cap 486, the taxes demanded by the Respondent are unlawful and unrecoverable.

19. That Section 311 (1) of the Act provides that only taxes in respect to the year immediately preceding the date a company is placed under receivership are collectible.

20. That accordingly, the preferential payment of any outstanding taxes in priority would only cover a period of the twelve months leading to receivership and not the 7 year period assessed/demanded by the Respondent.

21. That in this regard, the only reasonable demand ought to be for the period 18th September 2018 to 19th September 2019 as falling within the statutory period of twelve months preceding insolvency under Section 311(1) of the Companies Act.

22. The Appellant averred that Section 95(1) of the Companies Act (Cap 486) provides for the payment of creditors during receivership in order of priority. That such payments (including preferential payments) must be made out of the assets coming into the hands of the Receiver. That such preferential debts rank equally as provided under Section 311(5) of the Act.

23. That notwithstanding, since the placement of the Appellant under receivership, no assets has come to the hands of the Receiver Manager due to a series of court cases by the creditors including one granted by the High Court restraining the Receiver Manager from disposing of any movable and/or immovable assets of the Appellant.

24. The Appellant averred that the Respondent's demand was in breach of the Companies Act (Cap 486) and raised prematurely. That the Receiver Manager can only meet the demand, if assessed in accordance with the law and if the assets of the Appellant are within his control. That currently, the dealing in the assets of the Appellant has been restrained and is being supervised by the High Court.

25. That in any event, there is no VAT liability for the one year period preceding the receivership. That the VAT amounts demanded by the Respondent are not lawfully due.

26. In respect to PAYE for the year preceding the receivership, the Appellant stated that it had been under financial distress prior to the receivership and had consequently retained skeleton staff. That in any event the Appellant had stopped paying salaries of the employees once it started financial distress. It stated that all the employees were constructively declared redundant much earlier before the receivership took place, except the security and a number of Heads or Departments whose salaries were not remitted. That no PAYE liability arose in respect of the stated period.

27. It added that the PAYE assessment is unlawful and erroneous as it was in respect of employees who were no longer in employment of the Appellant. That the Appellant no longer paid salaries for the period under assessment.

28. That additionally, the PAYE demand by the Respondent is unreasonable, and unfair contrary to Article 47 of the Constitution of Kenya considering that even the skeleton employees retained by the Appellant during the period immediately preceding receivership did not receive any salaries.

29. That therefore the entire assessment was erroneous, excessive and premature and the taxes demanded were not lawful for the reasons stated above.

30. Regarding the objection, it averred that it was not true that the notice of objection was filed contrary to the provisions of the Tax Procedure Act as contended by the Respondent.

31. That the Appellant received the demand notice on 10th June 2021 and on 8th July 2021, the Appellant lodged a notice of objection to the tax demand pursuant to Section 51 of the Tax Procedures Act. That the notice of objection was lodged within 28 days inclusive of the date of lodging.

32. It averred that Section 51(2) of the Tax Procedures Act provides that 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. The Appellant stated that it lodged the notice of objection within the statutory timelines and no application for extension of time was required as contended by the Respondent.

33. The Appellant averred that the Respondent misinterpreted the above provision thus denying it the right to be heard. That failure of the Respondent to entertain the Appellant's notice of objection violates the Appellant's right to fair administrative action pursuant to Article 47 of the Constitution.

34. That in any case, the Appellant's objection was allowed as the Appellant did not receive any communication/decision from the Respondent within sixty days from the date of lodging the notice of objection. That Section 51(11) of the Tax Procedures Act provides that where the Commissioner has not made an objection decision within sixty days from the date that the taxpayer lodged a notice of the objection, the objection shall be allowed.

35. That the Respondent made the objection decision dated 15th October 2021 which was communicated to the Appellant on 18th October 2021. That the Respondent communicated the objection after 102 days from the date of the notice of objection which was lodged on 8th July 2021.

Appellant’s Prayers 36. The Appellant made the following prayers;a.That the objection be deemed to have been allowed by operation of the law by dint of Section 51(11) of the Tax Procedures Act.b.That without prejudice to the above prayer: such part of the demand by the Respondent for VAT and PAYE which falls outside the period stipulated in Sections 311 and 95 of the Companies Act be set aside.c.The Tribunal finds, holds and declares that there is a moratorium on legal processes against the Appellant by virtue of Section 560 of the Insolvency Act and the demand, enforcement and or collection of the taxes in question by the Respondent is stayed by operation of the said law.

Respondent’s Case 37. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal:-i.The Respondent’s Statement of Facts dated 24th December 2021 and filed on the same date together with the documents attached thereto.ii.The Respondent’s written submissions dated 23nd August 2023 and filed on 25th August 2023.

38. The Respondent averred that the Appellant filed its self-assessment tax returns for VAT for the tax period months April 2014 to February 2019 and PAYE for the tax period October 2013 to September 2019.

39. The Respondent averred that the Appellant filed self-assessment returns for the tax period but failed to make due the payments.

40. The Respondent stated that the Appellant was issued with additional VAT assessments vide a notice dated 15th November, 2019.

41. The Respondent averred that the Appellant failed to lodge an objection against the additional VAT assessments within 30 days as stipulated under Section 51(2) of the Tax Procedure Act, 2015.

42. The Respondent averred that the Appellant having failed to pay the self-assessment taxes and object to the additional VAT assessments the Respondent issued a demand notice dated 10th June, 2021.

43. That the Appellant through its Advocates objected to the demand notice vide a letter dated 8th July, 2021 stating that the Appellant was under receivership since 2019.

44. That the Respondent replied to the Appellant's objection notice vide an email dated 22nd July, 2021 where the Appellant was informed that it could not object to the self-assessment taxes of Kshs 8,145,596,813 being VAT and PAYE as this could not be dealt with under Section 51 of the Tax Procedures Act, 2015.

45. That the Appellant was also advised of its right to make application for amendment of self-assessment returns under Section 31 of the Tax Procedures Act, 2015.

46. The Respondent averred that the Appellant was further informed in the email dated 22nd July, 2021 to make an application under Section 51(7) of the Tax Procedures Act, 2015 objecting to the additional VAT assessments out of time.

47. The Respondent was of the view that the Appeal evokes the following issues for determination: -a.Whether the Respondent's demand notice dated 10th June, 2021 was proper in law?b.Whether the Respondent’s objection decision dated 15th October 2021 was proper in law?

48. The Respondent submitted that Section 24 of the Tax Procedures Act, 2015 allows a taxpayer to file self-assessment tax returns but further provides that the Commissioner is not bound by the information provided therein and can assess for additional taxes based on any other available information.

49. That the Appellant herein filed self-assessment tax returns for VAT for the tax period months April 2014 to February 2019 and PAYE for the tax period October 2013 to September 2019 as required under Sections 24 and 28 of the Tax Procedures Act, 2015.

50. The Respondent averred that the Appellant failed to make the payments despite having made a self-assessment prompting the Respondent to demand for payment.

51. The Respondent averred that vide a notice dated 15th November, 2019 the Appellant was issued with additional automated VAT assessments of Kshs 24,286,844. 16 being the principal tax.

52. The Respondent averred that the Appellant failed to pay the self-assessment taxes and to object to the additional VAT assessments prompting the Respondent to demand for the payment of the taxes vide a demand dated 10th June, 2021.

53. The Respondent averred that the Appellant through its Advocates objected to the demand notice indicating that the Appellant was under receivership since 2019.

54. The Respondent posited that the Appellant was informed through the email dated 22nd July, 2021 that it had not raised a valid objection to the additional VAT assessments and that one can't object to self-assessments taxes.

55. The Respondent submitted that objection decision dated 15th October, 2021 was proper in law as the Appellant filed a late objection to the additional VAT assessments and failed to pay the self-assessment taxes.

Respondent’s Prayers 56. The Respondent prayed that the Tribunal finds;a.That the objection decision dated 15th October, 2021 confirming taxes of Kshs 7,321,975,227. 80 for the tax period 2013 to 2019 be upheld.b.That the tax arrears of Kshs 7,321,975,227. 80 is due and payable.c.That this Appeal be dismissed with costs to the Respondent as the same is without merit.

Issues for Determination 57. The Tribunal upon due consideration of the pleadings and the written submissions filed on the separate parts of the parties was of the considered view that the Appeal herein raises the following issues for its determination namely;a.Whether the Appellant lodged a valid objection.b.Whether the there is a valid Appeal before the Tribunal.c.Whether the Appellant’s objection was allowed by operation of the law.d.Whether the Respondents tax demands were justified.

Analysis and Determination 58. Having identified the issues for determination, the Tribunal proceeds to analyse the same as follows:-a.Whether the Appellant lodged a valid objection.

59. The genesis of this dispute is the Respondent’s demand notice dated 10th June 2021 wherein it demanded payment of outstanding VAT and Income tax (PAYE). Before delving into the issues in this dispute, the Tribunal notes the following key correspondences in this case;a.The Respondent’s assessments orders issued online on 15th November 2019. b.The Respondent’s 14 days demand notice issued online on 10th June 2021. c.The Appellant’s objection to the demand notice dated 8th July 2021. d.The Respondent’s email communication to the Appellant dated 22nd July 2021 responding to the letter dated 8th July 2021. e.The Respondent’s letter dated 15th October 2021 and email dated 18th October 2021 forwarding the letter.f.The Appellant’s Notice of Appeal dated 16th November 2021 and filed on 17th November 2021.

60. The Respondent stated that the Appellant was issued with additional VAT assessments vide a notice dated 15th November, 2019.

61. That the Appellant failed to lodge an objection against the additional VAT assessments within 30 days as stipulated under Section 51(2) of the Tax Procedure Act, 2015.

62. The Appellant on its part averred that it received the demand notice on 10th June 2021 and on 8th July 2021, the Appellant lodged a notice of objection to the tax demand pursuant to Section 51 of the Tax Procedures Act. That the notice of objection was lodged within 28 days inclusive of the date of lodging.

63. The Appellant averred that Section 51(2) of the Tax Procedures Act provides that 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. The Appellant stated that it lodged the notice of objection within the statutory timelines and no application for extension of time was required as contended by the Respondent.

64. From the documents attached by both parties, it was not in dispute that the VAT Auto Assessment were issued by the Respondent on 15th November 2019.

65. Section 51 (1) & (2) of the Tax Procedure Act provides as follows regarding objection;“(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.” (Emphasis added)

66. The Appellant having been served with the VAT assessments on 15th November 2019, it ought to have lodged an objection to the assessments on or before 15th December 2019 as provided for under Section 51(2) of the Tax Procedures Act. This Section of the law is couched in mandatory terms and failure by a taxpayer to meet this requirement becomes fatal.

67. The Tribunal notes that the Appellant in its letter dated 8th July 2021 is objecting to the demand notice dated 10th June 2021. In response to the Appellant’s letter of 8th July 2021, the Respondent vide an email dated 22nd July 2021 informed the Appellant that its objection was late and reminded the Appellant of the provisions of Section 51(7) of the Tax Procedures Act when it stated in part as follows;“The assessments were raised on 15th November 2019 under the VAA (VAT auto Assessments) as result of inconsistencies on purchases claimed.Kindly note the following;Section 51(7) of the Tax Procedures Act (TPA reads as follows; ….Please adhere to the legal provisions above by first providing evidence as to why Commissioner should consider your case so as to be allowed to object late”

68. The Tribunal notes from the documents attached by both parties that the communication from the Respondent dated 10th June 2021 to which the Appellant was objecting to was titled “14 Days Demand Notice”. Further the narration in the notice stated as follows;“Records in this office show that you have tax outstanding of 7,321,975,227. 8 Kshs for the periods shown here below: …”

69. The Tribunal further notes that in response to the Appellant’s letter of 8th July 2021, the Respondent vide its letter dated 15th October 2021 while reiterating the contents of its email dated 22nd July 2021 stated in part as follows;“…The commissioner has reviewed your notice of objection and wish to respond as follows;1. VATa.Additional Assessment – Principal Tax of Kshs 24,286,844. 16The additional assessments were raised on 15th November 2019 under the VAT Auto Assessments (VAA) as result of inconsistencies on purchases claimed. We note you have not lodged an application to file a late objection in line with section 51(7) of the Tax Procedures Act (TPA) which states; …”

70. From the above correspondences the Tribunal noted that the Respondent was consistent in notifying the Appellant that the notice of objection was lodged late and advising the Appellant on the provisions of Section 51(7) of the Tax Procedure Act as the remedy available in law.

71. Going by the provisions of Section 51(2) of the Tax Procedure Act it follows that the Appellant’s time for lodging an objection lapsed on 15th December 2019, therefore the notice of objection dated 8th July 2021 was late by more than 17 months.

72. The Tribunal reiterates its position in the case of Tax Appeals Tribunal No 21 of 2018: Tangazo Letu Limited v The Commissioner of Investigations & Enforcement where the Tribunal held as follows:“We find that the Procedural guidelines enshrined in the Tax Appeals Tribunal Act and the Tax Procedures Act, among other tax legislations, are not merely instructive but a guide in achieving substantive justice. These rules cannot be cast aside in the quest for achieving substantive justice, as they have deeper roots in the Constitution of Kenya, 2010 to safeguard due process. Accordingly, we are of the considered view that the Appeal herein is improperly before the Tribunal”

73. The Tribunal is further guided by the Court of Appeal decision in Speaker of National Assembly v 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.”

74. It was the view of the Tribunal that as provided for under Section 51(1) of the Tax Procedures Act the Appellant cannot file an appeal without first objecting to the assessment.

75. In the circumstances, the Tribunal finds that the Appellant did not lodge a valid objection.

76. Having entered the above finding, the Tribunal did not delve into the other issues that fell for its determination as they had been rendered moot

Final Decision 77. The upshot of the foregoing is that the Appeal is incompetent and unsustainable in law. The Tribunal accordingly makes the following Orders:-a.The Appeal be and is hereby struck out.b.Each Party to bear its own costs.

78. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF MARCH, 2024ERIC NYONGESA WAFULA - CHAIRMANDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERCYNTHIA B. MAYAKA - MEMBERTIMOTHY B. VIKIRU - MEMBER