[2024] KETAT 41 (KLR)

Mwaura v Commissioner Domestic Taxes (Tax Appeal 1050 of 2022) [2024] KETAT 41 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 41 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1050 of 2022

RM Mutuma, Chair, BK Terer, EN Njeru, M Makau & W Ongeti, Members

January 26, 2024

Between

Patrick Njuguna Mwaura

Appellant

and

Commissioner Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a Kenyan Citizen duly registered as a taxpayer within the Republic of Kenya and the seller of a piece of land LR. No. 13537/1225 located within Juja in Kiambu County.

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 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 & 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. The Respondent carried out a return’s review and performed an analysis of the sale of a piece of land by the Appellant for July 2020 in order to confirm payment of Capital Gains Tax (CGT) and upon conclusion of the review, issued additional assessments on 23rd February 2022 after disallowing the adjusted costs and incidental costs claimed by the Appellant totaling Kshs. 3,668,500. 00.

4. The Appellant lodged an Objection on 23rd March 2022 on iTax and vide an email dated 13th July 2022, the Respondent requested the Appellant to provide reasons for the late objection together with supporting documents by 15th July 2022 failure to which the Appellant’s objection would be rejected for being invalidly lodged.

5. The Respondent confirmed the additional assessment on 15th July 2022.

6. Aggrieved by the Respondent’s decision, the Appellant filed an Appeal vide a Notice of Appeal dated 23rd September 2022, with leave of the Tribunal.

The Appeal 7. In its Memorandum of Appeal dated and filed on 23rd September 2022, the Appellant premised its Appeal on the following grounds.a.The Respondent erred in law and fact by arriving at an additional assessment for the reason of error in compounding CGT.b.The Respondent erred in law and fact by computing CGT on a property sold at Kshs. 75,000,000. 00 by simply calculating 5% of the purchase price with undue regard to the net gain.c.The Respondent erred in law and fact by failing to deduct incidental costs and adjusted costs from the purchase price before computing CGT.d.The Respondent erred in law and fact by disregarding, without reasonable cause, the Appellant's documentary evidence of the transfer value as proof of net gain.e.The Respondent erred in law and fact by failing to deduct the costs of developing the property from the purchase price to arrive at a net gain that is CGT taxable.f.The Respondent erred in law and fact by erroneously dismissing the Appellant's computation of transfer value that arrived at the CGT payable of Kshs. 81,500. 00.

The Appellant’s Case 8. The Appellant set down its case in its;a.Statement of Facts dated and filed on 23rd September 2022 together with the documents attached thereto;b.Written submissions dated 27th April 2023 and filed on 22nd September 2023.

9. He stated that the formula invoked by the Respondent in arriving at an additional assessment of CGT is in violation of provisions of the law and the Respondent's own official guide, as posted in its official website, for consumption by tax practitioners and taxpayers.

10. The Appellant averred that the Respondent calculated 5% of the purchase price to arrive at CGT payable with undue regard to the net gain and under an erroneous assumption that the entire purchase price of Kshs. 75,000,000. 00 is a taxable profit.

11. The Appellant stated that it incurred incidental costs of commission agency fees, legal fees, tenancy rarely termination costs, re- survey fees and title processing costs; totaling Kshs. 62,630,000. 00 to enable the sale of the property and that the Respondent did not deduct the Incidental costs from the purchase price before computing CGT at 5%.

12. The Appellant stated that the proof of all cost’s deductible from the purchase price in the Appellant's computation of the transfer value were furnished to the Respondent in justification of the Appellant's self-assessed CGT of Kshs. 81,500. 00. He added that the Respondent willfully and unlawfully erred in computing CGT contrary to documentation on deductible costs.

13. He averred that he substantially developed the property in the course of his ownership through the construction of an accommodation & entertainment complex consisting of cottages, hotel rooms, a restaurant, a dance floor, and incidental services at a total cost of Kshs. 59,000,000. 00 which costs are deductible from the purchase price in computing taxable net gain.

14. The Appellant averred that he furnished the Respondent with a detailed computation of transfer value, clearly computing the net value and the Respondent acted in error in disregarding his computation without challenging the formula used or the authenticity of the documentation in support.

15. That he duly computed and paid CGT and thus is not in default of CGT as alleged in the Respondent's additional tax assessment.

16. The Appellant relied on Section 3 (2) (f) of the Income Tax Act and submitted that the Respondent erred in law and fact by arriving at an additional assessment for the error in compounding CGT for the sale transaction.

17. The Appellant cited Paragraph 4 (1) of the Eighth Schedule of the Income Tax Act and contended that the adjusted costs to be taken into account include the amount of or value of the consideration for the acquisition or construction of the property, the cost of preserving the property, the cost of defending the title as well as the incidental costs to the transferor of acquiring the property.

18. He argued that the additional assessment of Kshs. 3,668,500. 00 added to the Appellant's computed CGT of Kshs. 81,500. 00 amounts to Kshs. 3,750,000. 00 which is the amount one arrives at when they compute the CGT rate of 5% of the entire purchase price of Kshs.75,000,000. 00.

19. The Appellant maintained that the provisions of the Income Tax Act that were in place at the time of the sale transaction stipulated in Section 34 (1) (j) that tax upon the capital gains of a person charged under Section 3 (2) (f) shall be charged at the rate of five percent and shall not be subject to further taxation. He added that the Respondent computed CGT for the Applicant, contrary to the provisions of the law and the evidence that the Appellant had issued it.

20. The Appellant submitted with the additional assessment, the Respondent implied that the gain which accrued to the Appellant upon transfer of property is the entire purchase price; however, the Respondent purports that the Appellant did not develop the property, a development that stands on the ground is an error. He further submitted that the Respondent ignored evidence of the costs of the transfer of property.

21. He reiterated that he furnished documentary evidence of deductibles to the Respondent prior to making the additional assessment. He further maintained that he purchased the property for a purchase price of Kshs. 2,000,000. 00 and later developed the property at a cost of Kshs. 59,000,000. 00.

22. That, in the course of the sale transaction, he incurred costs, ordinary to any sale of land transaction, which include: legal fees of Kshs. 1,900,000. 00, commission agency fees of Kshs. 5,000,000. 00, re-survey fees of Kshs. 420,000. 00, tenancy early termination costs of Kshs. 4,700,000. 00 and title processing fees of Kshs. 350,000. 00 thus the gain that accrued to him upon transfer of the property is not equal to the purchase price of the property and the computation of CGT by the Respondent was fundamentally flawed and deserving of being set aside.

23. The Appellant submitted that his Advocates on record furnished the Respondent's Mombasa Office with physical copies of the documents requested in the email dated 28th September 2021 which included capital gains tax computation, copies of invoices or documents supporting the incidental costs to transfer, copies of the two sale agreements at time of sale and at time of acquisition, copy of the title deed and copy of stamp duty valuation in compliance with the request to enable the Respondent to review the declarations of CGT of Kshs. 81,500. 00.

24. He submitted that the Respondent’s allegations that the Appellant never submitted the documents in support of his computation of the CGT are blatantly false and targeted to mislead this Honorable Tribunal in an effort to conceal a patent error as the Appellant submitted the documents upon receipt of the email dated 28th September 2021.

25. The Appellant contended that he came to know that the tax matter was taken over by the Respondent's Thika Office when he received an email from the said office on 2nd February 2022 requesting to be furnished with the requisite documents in support on the Appellant's CGT computation and the internal departmental hiccups of the Respondent should not be the cause of the Respondent incurring an unjustified and defective tax obligation.

26. He maintained that having furnished the Respondent with the relevant documentation, the Respondent computed an additional tax assessment without challenging the authenticity of the Appellant's CGT computation. He added that if the Respondent took into account the Appellant's documentation, the additional assessment would substantially vary in quantum to what was arrived at.

27. The Appellant argued that had the Respondent taken into account the documentation, they would have deduced that the gain accrued to the Appellant upon transfer of the parcel of land was not of equal value as the purchase price.

28. The Appellant submitted that Respondent violated the relevant provisions of the Income Tax Act in arriving at the additional assessment by failing to take into account the documentation provided by the Appellant for purposes of verifying the capital gains tax declaration of the Appellant.

29. He argued that had the Respondent invoked the correct formulae and taken into account the documentation provided by the Appellant, it would have arrived at a similar CGT quantum to what the Appellant self-assessed and paid.

The Appellant’s Prayers 30. The Appellant prayed for orders against the Respondent that:-a.This Appeal be allowed.b.The decision of the Respondent to levy additional CGT assessment of Kshs. 3,668,500. 00 against the Appellant be set aside.c.The costs of and incidental to the proceedings in this Tribunal be awarded to the Appellant.d.Such other further orders or reliefs as the Honourable Tribunal may deem just and expedient.

Respondent’s Case 31. The Respondent’s case is premised on its;a.Statement of Facts dated 19th October 2022 and filed on 21st October 2022 together with the documents attached thereto; andb.Written submission dated 17th April 2023 and file on the even date as here under;

32. The Respondent averred that the assessments were correctly issued and conformed to the Income Tax Act. It relied on Section 56 (1) of the Tax Procedures Act and added that the Appellant did not provide any evidence that would have altered the assessment as the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different objection decision.

33. The Respondent asserted that the Appellant lodged the objection on 23rd March 2022 on iTax which was received and acknowledged but, treated as invalidly lodged as it had been lodged out of time and the Appellant had not availed any documentation to support the same.

34. The Respondent contended that Section 51 of the Tax Procedures Act empowers it to notify a party where an objection as lodged is invalid and the Appellant was notified and requested to provide documents. However, the Appellant failed to provide documents as requested.

35. The Respondent averred that the Appellant was uncooperative in the provision of relevant records and failed to respond to request of documents hence no relevant documents or records were provided to support the objection by the Appellant. It maintained that as a result, the assessment was made based on the only available information based on the best judgment by the Respondent per Section 59 (1) of the Tax Procedure Act which empowers the Respondent to require the production of such documents vide issuance of notice as deemed necessary in the determination of tax liability.

36. The Respondent stated that Section 31 (1) and (2) of the Tax Procedure Act empowers it to make alterations or additions to original assessments from available information for a reporting period based on the best judgment.

37. The Respondent contended that the Appellant failed to provide the documents requested in support of his objection hence the CGT incidental costs were disallowed as Section 24 (1) and (2) & Section 29 (1) of the Tax Procedures Act empowers the Respondent to carry out assessments based on the information available.

38. The Respondent maintained that the sale of the parcel of land was in contravention of Section 43 (1) of the Tax Procedure Act which requires such documents be maintained for purposes of taxation.

39. The Respondent denied that the Appellant has paid all its tax dues and reiterated that because of its under-declaration, the Appellant is in debt of Kshs. 1,303,878. 87

40. The Respondent referred to Section 50 (1) (a) of the Tax Procedure Act No. 29 of 2015 and submitted that there is a rebuttable presumption in tax matters that an assessment by the Respondent is correct.

41. It relied on the case of Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya [2021] eKLR and argued that the Appellant did not provide any evidence that would have altered the assessment. It added that the Tax Procedure Act places the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent in arriving at a different objection decision.

42. The Respondent submitted that the Appellant was uncooperative in the provision of relevant records and failed to respond to the request for documents hence no relevant documents or records were provided to support the objection by the Appellant, a result of which the assessment was made based on the only available information based on the best judgement by the Respondent.

43. The Respondent maintained that in fulfilling its mandate it assessed the income in accordance with the Income Tax Act, Section 73 and cited the case of Janet Kaphiphe Ouma and another vs. Marie Stopes International (Kenya), HCC No. 68 of 2007 adding that the Appellant has failed to provide evidence to discredit the assessments by the Respondent’s and thus the same ought to be deemed correct and proper in law.

44. The Respondent submitted that it performed an analysis of sale of piece of land by the Appellant for the period July 2020 in order to confirm payment of Capital Gains Tax and established that the Appellant sold a piece of land LR No. 13573/1225 sometimes in July 2020 but failed to pay capital gains tax as required.

45. It reiterated that it consequently issued additional assessments on 23rd February 2022 based on disallowing the adjusted costs and incidental costs claimed by the Appellant totaling to Kshs. 3,668,500.

46. The Respondent further submitted that the Appellant provided no explanations requested hence the same was disallowed and additional assessments carried out.

47. It asserted that the assessment was issued based on the information provided as this was the only reasonable basis for assessing the CGT in the absence of the documents to support its position per Section 31 of The Tax Procedure Act and cited the case of Trust Bank Ltd vs. Paramount Universal Bank Ltd and 2 others (2009) eKLR. It added that the Appellant's request to allow the CGT claim remains mere statements with no evidence to substantiate his claim and an offense under tax laws.

48. The Respondent submitted that the Appellant knowingly and recklessly committed an offense according to Sections 94 & 95 of the TPA.

49. It further relied on the cases of Osho Drappers Ltd vs. Commissioner of Domestic Taxes, TAT No. 159 of 2018; and Miao Yi vs. Commissioner of Investigations & Enforcement TAT no 441 of 2019 and reiterated that the proper way prescribed by law under Sections 43 and 93 for the Appellant to dispense its burden of proof is by the production of documents especially for books of accounts but the Appellant failed to do so thus not substantiating his claim.

50. The Respondent submitted that the Appellant in this matter has failed to prove that the Respondent's assessments were excessive therefore the burden of proof lies with them to prove otherwise per Section 30 of the Tax Appeals Tribunal and section 56 of the Tax Procedures Act which impose the burden of proof on the taxpayer to prove that an assessment is excessive or a tax decision is incorrect. It added that Section 59 of the Tax Procedures Act and Section 43 of the VAT Act, 2013 on keeping and production of documents when required by the tax authorities.

51. It buttressed its position by relying on the case of Okiya Omtatah Okoiti vs. Attorney General & Another [2020] eKLR; Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya [2021] eKLR; and Dyer & Dyer Limited vs. Commissioner of Domestic Taxes TAT 139 of 2020 to submit that the Appellant who possesses the evidence to challenge the Respondent's assessments has not substantiated and proved its case by availing the requisite documents as required by Section 59 (1) of the TPA to furnish or challenge the commissioner with information relating to the tax liability assessed.

The Respondent’s Prayers 52. The Respondent, therefore, prayed for orders that the Tribunal to:a.Uphold the Respondent’s assessment as proper and in conformity with the provisions of the law.b.Uphold the objection decision carried out by the Respondent.c.This Appeal be dismissed with costs to the Respondent.

Issues for Determination 53. After perusing the Memorandum of Appeal and parties' Statements of Facts together with their submissions and documentation attached therewith, the Tribunal presents the following issues for determination:a.Whether the Respondent’s Objection Decision dated 15th July 2022 was valid pursuant to Section 51(7) of the Tax Procedures Act 2022; andb.Whether the Respondent’s assessment disallowing the Appellant’s claim for costs was justified.

Analysis and Findings 54. The Respondent assessed the Appellant for CGT vide assessment dated 23rd February 2022. The Appellant filed an application dated 6th July 2022 before the Respondent seeking for an extension to lodge a notice of objection. On 15th July 2022, the Respondent wrote to the Appellant communicating the rejection of the application for extension of time on grounds that the Appellant had failed to provide documents in support of the application seeking leave to file notice of objection out of time.

55. According to the Respondent, the Appellant failed to comply with the provisions of Section 51 (7) of the Tax Procedures Act therefore, confirmed its assessments. The Appellant was dissatisfied by the Respondent’s decision. On 19th August 2022, the Appellant then filed an application for extension of time at this Tribunal seeking to lodge an appeal out of time, which the Tribunal allowed.

56. The Tribunal has perused the Respondent’s letter dated 15th July 2022 wherein the Respondent rejected Appellant’s application for extension of time. The Tribunal has examined the Appellant’s Memorandum of appeal and statement of facts and notes that these two documents do not challenge the Respondent’s decision to reject an application to extend time to enlarge time for filing a notice of objection out of time.

57. Section 51 (6) and (7) of the Tax Procedures Act provides as follows:‘‘(6) A taxpayer may apply in writing to the Commissioner for an extension of time to lodge a notice of objection.(7)The Commissioner shall consider and may allow an application under subsection (6) if—(a)the taxpayer was prevented from lodging the notice of objection within the period specified in subsection (2) because of an absence from Kenya, sickness or other reasonable cause; and(b)The taxpayer did not unreasonably delay in lodging the notice of objection.’’

58. Section 51 (6) and (7) of the Tax Procedures Act foresees scenarios where a tax payer may delay to lodge notice of objection and allows the Respondent to enlarge the time under if the tax payer has valid reasons. This is why the Appellant filed an application dated 6th July 2022 before the Respondent seeking for an extension to lodge a notice of objection but the Respondent rejected this application vide a letter dated 15th July 2022.

59. Pursuant to Section 52 (1) of the Tax Procedures Act, the Appellant had all rights to appeal against the Respondent’s rejection to enlarge time for filing notice of objection. Section 52 (1) of the said Act provides as follows:‘‘A person who is dissatisfied with an appealable decision may appeal the decision to the Tribunal in accordance with the provisions of the Tax Appeals Tribunal Act, 2013 (No. 40 of 2013).’’

60. It means that the Appellant had all rights to appeal against the Appellant’s decision dated 15th July 2022.

61. Whereas the Respondent issued its decision on 15th July 2022, the Appellant did not appeal against this decision within the required timeframe. 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.’’

62. Since the Appellant did not lodge an appeal against the decision of 15th July 2022 at this Tribunal within 30 days, the Appellant lodged an application for enlargement of time at the Tribunal pursuant to Section 13 (3) and (4) of the Tax Appeals Tribunal Act, 2013 (No. 40 of 2013). The Tribunal allowed the Appellant to file the Appeal out of time.

63. The Appellant in its Memorandum of Appeal however, failed to challenge the Respondent’s decision to reject the request to file a notice of objection out of time. Instead, the memorandum of appeal is challenging merits of the Respondent’s assessment.

64. The following is what the Appellant ought to have done once this Tribunal granted time to file the Appeal out of time:a.The Appellant ought to have stated reasons why the Respondent ought to have allowed the application to enlarge time for filing notice of objection out of time;b.The Appellant ought to provided evidence that the Appellant tendered before the Respondent in support of the application to enlarge time for filing notice of objection out of time for this Tribunal to re-evaluate to make a determination.

65. The Tribunal would then re-evaluate the grounds and evidence and would decide whether the Respondent was justified in rejecting the Appellant’s application for enlargement of time for filing a notice of objection out of time or it would disagree with the Respondent’s decision then refer the matter back to the Respondent to evaluate on its merits.

66. In simpler terms, since the Appellant’s notice of objection was rejected for being statutory time barred yet the Appeal is not challenging that fact in the Memorandum of Appeal, then, this Tribunal cannot evaluate whether the CGT assessments were correct or incorrect.

Final Decision 67. The upshot to the foregoing is that the Appeal is not meritorious and the Tribunal consequently makes the following Orders; -a.The Appeal be and is hereby dismissed.b.The Respondent’s invalidation decision issued on 15th July 2022 be and is hereby upheld.c.Each party to bear its own cost.

68. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JANUARY, 2024ROBERT M. MUTUMA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHA NJERU - MEMBERMUTISO MAKAU - MEMBERDR WALTER ONGETI - MEMBER