[2025] KETAT 166 (KLR)

Musraj Petroleum Limited v Commissioner of Legal Services and Board Coordination (Tax Appeal E395 of 2024) [2025] KETAT 166 (KLR) (Civ) (6 March 2025) (Judgment)

Neutral citation: [2025] KETAT 166 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal E395 of 2024

CA Muga, Chair, BK Terer, EN Njeru & SS Ololchike, Members

March 6, 2025

Between

Musraj Petroleum Limited

Appellant

and

Commissioner of Legal Services and Board Coordination

Respondent

Judgment

1. The Appellant was registered in Kenya as a limited liability company under the Companies Act, Cap 486 of the Laws of Kenya on 10th March 2020 and commenced operations on 4th April 2020 dealing in marketing and bulk supply of petroleum products.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “the Act”). Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to 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 Part 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. On 24th October 2023, the Appellant was issued with a notice of assessment. Subsequently, in a letter dated 13th December 2023, the Respondent outlined its findings resulting from a compliance check on Appellant’s declarations and claims culminating in additional assessments totaling Ksh 22,581,092. 00 in relation to corporation tax and VAT for 2021 and 2022 years of income.

4. The Appellant objected to the additional assessments in their entirety vide a letter dated 23rd December 2023 and filed with the Respondent on 17th January 2024.

5. Subsequently, on 7th March 2024, the Respondent rendered its objection decision confirming principal corporation tax and VAT of Ksh 22,581,092. 00 in relation to 2021 and 2022 years of income.

6. Aggrieved by the Respondent’s objection decision dated 7th March 2024, the Appellant filed its notice of appeal dated 26th March 2024 on 9th April 2024.

The Appeal 7. The Appellant’s case was predicated upon the following grounds as outlined in the Memorandum of Appeal dated and filed on 9th April 2024:i.The Respondent erred law and in fact by disallowing purchase invoices in both the VAT and income tax returns of the Appellant contrary to Section 17 of the Value Added Tax Act, CAP 476 of the Laws of Kenya (hereinafter “VAT Act”) and Section 15 of the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”). The Respondent’s decision disregarded the explicit provisions of these sections, which affirm the right of a registered person and a taxpayer to claim input tax and expenses that are incurred in the generation of taxable sales and income respectively.ii.The Respondent erred in law and in fact by failing to provide adequate clarity regarding the methodology used to arrive at the additional assessment of VAT amounting to Ksh 3,222,311. 00 thereby preventing the Appellant from properly understanding and addressing the basis for the said assessment. This lack of clarity deprived the Appellant of the opportunity to present a comprehensive objection and was in contravention of principles of fair administration of tax justice as it relates to providing taxpayers with clear and specific reasons for tax assessments.iii.The Respondent erred in law and in fact by not fully considering the Appellant’s unique business circumstances, particularly its low gross margins within a regulated industry, when making the tax assessment which has resulted in an inequitable and unrealistic tax burden that threatens the viability of the Appellant’s business operations. This oversight fails to consider the economic realities facing businesses in regulated industries such as the Appellant’s and does not conform to the principles of equity and reasonableness in tax assessment.iv.The Respondent erred in law and in fact by failing to consider the Appellant’s application to amend errors in the filing of VAT returns contrary to the provisions of Section 31(2) of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”), which expressly permit taxpayers to make such application for amendments in order to correct errors or omissions in their tax returns.v.The Respondent erred in law and in fact by assessing tax liability on the Appellant based on tax records and information provided by third parties and which records the Appellant did not have access to.vi.The Respondent erred in law and in fact by ignoring the fact that it is not the responsibility of the Appellant to ensure third parties give accurate tax declarations to the Respondent about the purchases they have made from the Appellant.vii.The Respondent erred in law and in fact by failing to consider all the support documents availed by the Appellant and thus ignored the Article 47 of the Constitution of Kenya 2010 (hereinafter “the Constitution”) which guarantees the taxpayer fair administrative action.

Appellant’s Case 8. The Appellant’s statement of facts dated 9th April 2024 was filed on even date wherein the Appellant stated that, Section 15 of ITA as read with Section 17 of the VAT Act expressly allow offset of legitimate business expenses against revenues as well as deduction of input tax on taxable supplies respectively while establishing income liable to tax yet the Respondent overlooked these clear directives as specified within these legislations.

9. It was the Appellant’s case that there was lack of clarity on the basis for demand for VAT of Ksh 3,222,311. 00 yet the Appellant had informed the Respondent that it required the finding in relation to the additional VAT assessments to help it make analysis and provide explanations. That this lack of transparency impeded the Appellant’s capacity to fully understand and contest the grounds of the assessment which was a contravention of standards of fair administrative practices and negated the its right to explication of their tax liabilities.

10. The Appellant averred that the Respondent failed to consider the operational circumstances within a highly regulated sector with recurrent slender gross profit margins. An oversight that was inequitable and inconsistent with commercial realism that the Appellant operated under. That this disproportionate evaluation failed to align with fundamental principles of equity and rationality in tax assessment and was detrimental to the Appellant’s continued viability.

11. That contrary to Appellant’s rights as enshrined under Section 31(2) of the TPA, the Respondent failed to consider an application to correct errors in the VAT returns which was unsupportive of the procedural fairness owed to the Appellant.

Appellant’s Prayers 12. The Appellant made the following prayers to the Tribunal:a.That the Appeal be allowed with costs.b.That the Respondent’s decision dated 7th March 2024 be set aside in its entirety.c.Any other orders the Tribunal may deem fit.

The Respondent’s Case 13. The Respondent replied to the Appeal through its statement of facts dated and filed on 10th May 2024.

14. According to the Respondent, it did not err in disallowing invoices since some of the disallowed purchase invoices in both the VAT and income tax bore discrepancies such as under-declarations while others were duplicated, a variance that was not addressed by the Appellant in its notice of objection.

15. It was the Respondent’s case that it made a reasonable decision based on information available as provided for by Section 31 of the TPA since there were variances yielded when sales declared in Appellant’s VAT returns and purchases claimed from various buyers were compared. It was these inconsistencies that the Respondent brought to charge under income tax and VAT.

16. Further, it was the Respondent’s assertion that the Appellant was granted time to amend its returns as the notice of assessment was sent on 24th October 2023 followed by a letter of findings on 13th December 2023 requesting documents. Thus, the Appellant could not fault the Respondent for its actions as enough time was availed for it to furnish requisite documents but failed to do so.

17. The Respondent stated that while using available information to the best of its judgement, it conducted a compliance check on the Appellant’s declarations and claims made from their PIN led to raising of additional assessments after variances were noted in;i.Appellant’s VAT returns and turnover as per the income tax return (IT2C) for the year 2021 resulted in a variance of Ksh 370,245. 00 which was not addressed by the Appellant in its notice of objection.ii.Comparison between sales declared in Appellant’s VAT returns and purchases claimed from the Appellant by various buyers, an inconsistency that was used to arrive at the final assessment.iii.A review of Appellant’s returns identified duplicate invoices with taxable value which were disallowed for both VAT and income tax returns as the purchases as per VAT matched purchases as per income tax returns.

18. The Respondent conceded that it was not the responsibility of the Appellant to ensure that third parties provide accurate tax declarations but that however, the Respondent noticed the variances between income tax sales and VAT sales as well as when comparing claimed purchases by various buyers which were brought to charge under VAT and income tax.

19. The Respondent asserted that it arrived at the correct decision based on all available information to the best of its judgement and all supporting documents provided by the Appellant while adhering to the law and that was why it vacated all the taxes which were supported.

Respondent’s Prayer 20. The Respondent made the following prayers:i.That the Tribunal finds the objection decision dated 7th March 2024 as proper in law.ii.That the Tribunal dismiss the Appeal with costs for lack of merit.

Parties’ Written Submissions 21. On 29th January 2025, the Tribunal adopted the Appellant’s written submissions. The Tribunal directed that the Respondent’s case would proceed on the basis of its pleadings as it did not file written submissions.

22. The Appellant’s written submissions were dated 2nd December 2024 and filed on 16th December 2024 wherein the Appellant submitted on three issues as follows:

i. Whether the Respondent erred by not considering the application for amendment of self-assessment return by the Appellant. 23. Whilst relying on Section 51(1)- (4) of the TPA, the Appellant submitted that it availed a valid objection clearly stating two grounds of objection, the amendments required, and reasons for the amendments which in this case was an error in filing of sales that gave rise to claims of Ksh 59,021,218. 00 by purchasers for the 2021/2022 period. That this was why the Appellant sought to amend its VAT returns to reflect the correct figures in it letter of 23rd December 2023.

24. That the Respondent’s refusal and or failure to avail reasons for rejecting the application to the amendments was contrary to Section 31(2) of the TPA which provides as follows:“A taxpayer who has made a self-assessment may apply to the Commissioner, within the period specified in subsection (4)(b)(i), to make an amendment to the taxpayer’s self-assessment.”

25. The Appellant asserted that the Respondent deprived it the right to correct an honest mistake in its VAT returns and relied on the case of Feradon Associates Limited vs Commissioner of Domestic Taxes (TAT No. 128 of 2016)to buttress its position that the Respondent must act within the statutory timelines and give reasons when rejecting an application for amendment. Moreover, that the Respondent’s objection decision issued on 7th March 2024 failed to address the issue of amendment which was a central issue in the Appellant’s objection choosing instead to reference the matter in its statement of facts dated 10th May 2024 claiming that the Appellant had been granted time to amend the returns.

26. The Appellant averred that the Respondent’s oversight meant that it failed to fully and fairly consider the Appellant’s application for amendment.

(ii) Whether the Respondent was just in disallowing invoices in both VAT and income tax. 27. The Appellant held that the provisions of Section 17(1) of the VAT Act and Section 15(1) of the ITA embodies the well-established principles that deductible expenses must be allowed when establishing taxable income of a taxpayer as this ensures any costs directly related to generating income are considered. Thus, it was unjust for the Respondent to disallow Appellant’s invoices for both VAT and income tax purposes which contravened the principle of fairness and accuracy in tax assessments yet the Appellant’s expenses were legally justifiable.

28. The Appellant submitted the claim by Respondent that certain invoices were disallowed for both VAT and income tax purposes due to discrepancies such as under declaration and duplication lacked merit for several reasons and should not justify the disallowance of legitimate input VAT and deductible expenses. That even that being the case, the Appellant had acknowledged errors in filing which were not intentional and that was the reason the Appellant had sought to amend the returns but was denied the opportunity by the Respondent whereas Section 31(2) of the TPA provides for such an amendment.

(iii) Whether the objection decision dated 7th March 2024 was proper in law 29. The Appellant submitted that the objection decision issued on 7th March 2024 was flawed in law as it failed to comply with provisions of Section 51(8) and (10)of the TPA further it did not provide material findings and reasons or address substantive issues raised in the Appellant’s notice of objection, instead the Respondent issued a blanket confirmation of additional assessments. The Appellant reiterated the Tribunal’s holding in the case of Kenafric Industries Limited v Commissioner of Domestic Taxes[2020]eKLR that;“Accordingly, the Tribunal finds that it's unfair of the Respondent in failing to consider the reasons tendered by the Appellant for the late submission of its PAYE returns. We also find that the Respondent's actions to be a gross violation of the provisions of Article 47 of the Constitution of Kenya, 2010. Article 47 (1) of the Constitution entitles the Appellant to an administrative action that is expeditious, efficient, lawful, reasonable and procedurally fail. The Respondent's actions of imposing penalty when the threshold for such imposition had not been met, negligently failing to respond to the Appellant's letter and, finally illegally using the Appellant's input to offset a non-existent penalty does not meet the standard of administrative action set out in Article 47 (1) of the Constitution of Kenya. 2010. ”

30. The Appellant averredr that the Respondent’s decision was not only a breach of statutory obligations under Section 51(10) of the TPA but a violation of the Appellant’s right to fair administrative action as couched under Article 47 of the Constitution and was thus improper in law.

Issues For Determination 31. The Tribunal having carefully considered the parties’ pleadings, documentation and Appellant’s submissions adduced before it notes that two issues distill for its determination as follows;i.Whether the Appeal is properly before the Tribunalii.Whether the Respondent’s objection decision of 7th March 2024 was justified

Analysis And Findings 32. The Tribunal having established two issues for determination will proceed to analyze them as follows;

i. Whether the Appeal is properly before the Tribunal. 33. The genesis of the instant dispute was a compliance check on Appellant’s declarations and claims culminating in additional assessments relating to VAT and income tax for 2021 and 2022 years of income totaling to Ksh 22,581,092. 00 on 13th December 2023 that was sustained in the Respondent’s objection decision of 7th March 2024.

34. The Tribunal observes that the Appellant’s notice of appeal against the Respondent’s decision was dated 26th March 2024 and filed on 9th April 2024. Paragraph 3(b) of the Tax Appeals Tribunal (2015) Procedure Rules provides as follows:“a notice of appeal shall be submitted to the clerk of the Tribunal within thirty days upon receipt of the decision of the Commissioner.” Section 51(12) of the TPA provides as follows:“A person who is dissatisfied with the decision of the Commissioner under subsection 11 may appeal to the Tribunal within thirty days after being notified of the decision”

35. The Tribunal notes that Section 13(3) and (4) of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”) donates provisions allowing a taxpayer to seek leave from the Tribunal for late filing of the Appeal. The cited provisions provide as follows:“(3)The Tribunal may, upon application in writing or through electronic means, extend the time for filing the notice of appeal and for submitting the documents referred to in subsection (2).(4)An extension under subsection (3) may be granted owing to absence from Kenya, or sickness, or other reasonable cause that may have prevented the applicant from filing the notice of appeal or submitting the documents within the specified period.”

36. The Tribunal notes that in the instant matter the Appellant had up to 7th April 2024 to lodge its Appeal with the Tribunal but the same was done on 9th April 2024 which was in contravention of the strict statutory edicts first requiring that an Appeal must be filed within 30 days and second, the late filing of the Appeal was without leave of the Tribunal first having been sought. The Tribunal reiterates its following holding in the case of; Salsa Global Investment Co. Limited v Commissioner of Domestic Taxes [TAT 254 of 2021]:“Flowing from the above, this Tribunal finds that this Appeal was filed out of time without seeking and obtaining prior leave of the Tribunal. The Appeal is thus found to be defective for being in contravention of the law and hence the Tribunal lacks the requisite jurisdiction to hear and determine the same.”

39. Accordingly, the Tribunal’s finding is that the Appeal herein was improperly brought before it and must down its tools for want of jurisdiction.

40. The second issue for determination has been rendered moot by the Tribunal’s finding.

Final Decision 39. The upshot of the foregoing is that the Appeal herein fails and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby struck outb.Each party to bear its own costs.

39. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 6TH DAY OF MARCH, 2025. ………………………………….CHRISTINE A. MUGACHAIRPERSON………………………….. …………….……………..BONIFACE K. TERER ELISHAH N. NJERUMEMBER MEMBER……….……..…………….OLOLCHIKE S. SPENCERMEMBER