[2023] KETAT 862 (KLR)

Naff Energy Limited v Commissioner of Domestic Taxes (Tax Appeal 962 of 2022) [2023] KETAT 862 (KLR) (10 November 2023) (Judgment)

Neutral citation: [2023] KETAT 862 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 962 of 2022

Grace Mukuha, Chair, E Komolo, Jephthah Njagi, T Vikiru & G Ogaga, Members

November 10, 2023

Between

Naff Energy Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly registered under the Companies Act and is a registered taxpayer. Its principal business is in petroleum retail sector in Molo, Nakuru County.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 460 Laws of Kenya. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all revenue. Under Section 5(2) of the Act with respect to the performance of its function under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part I & II 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 10th May, 2022, the Respondent assessed the Appellant for VAT amounting to Kshs. 2,248,464. 48.

4. The assessment was based on a compliance verification exercise conducted by the Respondent on its iTax platform which revealed a variance of Kshs. 14,349,903. 00 between the turnover declared in the annual income tax return and that declared in the corresponding VAT returns.

5. The Appellant then lodged a late objection application on 13th July 2022.

6. The Respondent requested the Appellant on 19th July 2022 for supporting documents/evidence for its late objection application.

7. The Appellantvidea letter dated 25th July 2022 requested for an extension of time to provide the required information and evidence in support of its claim.

8. The Respondent rejected the late objection application and extension of time vide a letter dated 26th July 2022.

9. Aggrieved by the Respondent’s decision, the Appellant lodged a Notice of Appeal dated 23rd August 2022, and filed on the same date.

The Appeal 10. In its Memorandum of Appeal filed on 6th September 2022, the Appellant premised its Appeal on the following grounds:-i.That the Commissioner erred in facts by raising default assessment on arriving at the Commissioner’s decision on income tax.ii.That the Commissioner erred in facts by disallowing amendments of the income tax returns which were entered with mistakes.iii.That the Commissioner took advantage of the taxpayer’s ignorance in income declaration and tax matters and raised a default assessment and based her decision on wrong figures, amended returns in some cases adding non existing income and disallowing some input VATfollowing the due procedure of arriving at the tax due.iv.That the claimed VATof Kshs. 3,076,619. 00 is not based on facts, is excessive and erroneous hence disputed in totality.

The Appellant’s Case 11. The Appellant filed its Statement of Facts on 6th September 2022 together with annexures attached thereto.

12. The Appellant averred that there was no request to audit it for the year 2019. That however, there was a default assessment in the system followed by agency noticevide a letter dated 13th June 2022.

13. That the Respondent raised a default assessment of the Appellant’s VATtaxes for the period 2019 obligation of Kshs. 3,076,619. 00 and raised default assessment and demanded gross amount through a letter dated 26th July 2022.

14. That the Respondent ignored the Appellant’s bank statements and ETR reports.

15. That the Appellant objected to the additional/default assessment findings of 13th June 2022 through a notice of objection application.

16. That the Respondent gave VAT additional assessment based on the variance between income tax returns and VAT.

17. That the Appellant mistakably filed income tax with an income of Kshs. 16,421,090. 00 instead of Kshs. 2,071,187. 00.

18. That the Appellant vide a letter dated 23rd August 2022 filed an intention to appeal the objection decision as perTATAct.

The Appellant’s Prayersa.That the amount in dispute be reviewed considering the documents and financial statements availed and filed.

The Respondent’s Case 19. The Respondent premised its case on the following documents before the Tribunal:-a.The Respondent’s Statement of Facts dated 4th October 2022 and filed on the same date.b.The Respondent’s Written Submissions dated 16th March 2023 and filed on the same date.

20. The Respondent averred that it assessed the Appellant on 10th May 2022 for VATamounting to Kshs. 2,923,003. 82.

21. That the assessment was based on compliance verification exercise by the Respondent which revealed a variance of Kshs. 14,349,903. 00 between the turnover declared in the annual income tax return and that declared in the corresponding VAT returns.

22. That the Appellant lodged a late objection application on 13th July 2022.

23. That on 19th July 2022, the Respondent requested from the Appellant supporting documents and evidence in support of the late objection reasons.

24. That the Appellant vide a letter dated 25th July 2022 requested for an extension of time to provide the required information and evidence in support of its claim.

25. That the Respondent in compliance with strict statutory timelines on objection review rejected the late objection application and request on extension of time by the Appellant and subsequently confirmed the tax assessed.

26. The Respondent further averred that it issued an additional assessment based on the variances identified from the Appellant’s self-assessments as filed on the iTax platform and no decision on income was issued by the Respondent.

27. That the amendments referred to by the Appellant were not brought to the attention of the Respondent, either through amendments on iTax or vide any form.

28. That the Appellant did not lodge a valid objection neither did it provide the documents requested to ascertain its late objection or warrant a review of the substantive issues of the case, as the Appellant never satisfied the grounds of objection as required by section 51(3) of theTPA.

29. That the Appellant lodged its objection out of time contrary to Section 51 (2) of the TPA, which requires an objection to be made within 30 days of being notified of the decision.

30. That the Respondent issued an assessment order on 10th May 2022 stipulating additional assessments of VAT amounting to Kshs. 2,248, 464. 48, whilst the Appellant objected to this assessment on 13th July 2022 and alleged poor network in the rural areas and alleged the variances were due to farming income which is not vatable but was included in the annual return without any evidentiary record or documentation.

31. That the Respondent in adherence to the law, Section 51 (7) of the TPA, and in good faith requested the Appellant to explain the reasons for the late objection vide an email dated 19th July 2022.

32. That the Appellant blatantly disregarded this act of good faith and requested extension of time without any reasonable claim, which led to the Respondent to reject the extension of time and confirm the additional assessment.

33. That the Appellant failed to provide all supporting documentation when lodging the objection and was unresponsive despite a subsequent follow up by the Respondent.

34. That the Appellant was uncooperative in availing its documents to prove the alleged mistakes it made that caused variances which it claimed were due to farming income which is not vatable, but was included in the annual return.

35. That the onus is on the Appellant to prove that the Respondent erred in disallowing its input tax and accordingly provide the documents to justify its objection as highlighted in Section 17 (2) and (3) of the VATAct.

36. That it is evident through various email correspondences that the Respondent requested for these documents and the allegations by the Appellant ought to be disregarded as the Respondent was in adherence to Section 59(1)(b) of the TPA.

37. That the Appellant never provided all the documents as per Section 51(3) of the TPA, and should therefore not purport that the Respondent erred in law in its assessment as the Appellant failed to meet the threshold of a validly lodged objection.

38. That the Appellant’s grounds for appeal were not sufficient, and that the Appellant did not provide any evidence contrary to the basis of the Respondent’s assessment.

39. That the law is clear on the burden of proof and the Appellant has not produced any evidence to support the averments contained in its Statement of Facts.

The Respondent’s Prayers 40. The Respondent prays that the Tribunal to finds:-a.That the Respondent’s additional assessment to the Appellant amounting to Kshs. 2,248,464. 48 and respective penalties and interest is valid and therefore upheld.b.That the Appeal be hereby dismissed with costs to the Respondent as the same is without merit.

Issues for Determination 41. Having reviewed the Memorandum of Appeal, Statements of Facts filed by both parties, and the Respondent’s written submissions, the Tribunal identified the following issue for determination:a.Whether the Respondent erred in Confirming Appellant’s Additional Tax Assessment.

Analysis and Findings 42. The Tribunal notes that the gist of dispute between the parties relates to additional VATtax assessment conducted by the Respondent on the Appellant for income year 2019.

43. Documents and evidence on record and filed by both parties confirm that the Respondent conducted a compliance verification through its iTax platform and issued an assessment order on 10th May 2022.

44. It is also not disputed by either party that the Appellant filed an application to file late objection on 13th July 2022 and highlighted poor rural network as the basis for late objection.

45. The Appellant further averred in its application for late objection that the income difference was from farming which was not vatable and requested extension of time to file its audited reports to guide amendment of the returns.

46. The Tribunal further notes that the Appellant and Respondent corresponded in the intervening period, whereupon on 25th July 2022, the Appellant specifically wrote and requested extension of time by two (2) days to file the reports as it was having delays in getting some data.

47. The Tribunal further notes that this application by the Appellant was rejected by the Respondent the following day, being 26th July 2022, thereby confirming the assessment for additional taxes due from the Appellant. The Respondent averred that this was occasioned by strict statutory timelines.

48. The Respondent further submitted that the Appellant failed to produce additional materials/evidence despite reminders.

49. From the totality of evidence before us, the Tribunal is of the view that the applicable law in the instant appeal is found in Sections 51(6), (7) and (7A) of theTPAon application for extension of time to file late objection, which provide 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 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 absence from Kenya, sickness, or other reasonable cause; and(b)the taxpayer did not unreasonably delay in lodging the notice of objection.(7A)The Commissioner shall notify the taxpayer of the decision made under subsection (7) within fourteen days after receipt of the application”

50. The Tribunal notes that from the foregoing, the Respondent is required to communicate its decision within 14 days on the application to file a late objection. In the instant case, the Appellant lodged its application to file late objection on 13th July 2022, and logically this would have lapsed on or about 27th July 2022.

51. The Tribunal is of the view that failure by the Respondent to make a decision would have triggered statutory provisions on timelines in tax matters.

52. The question of statutory timelines in tax matters is now settled and reiterated in Equity Group Holdings Limited vs Commissioner of Domestic Taxes [2021]eKLR, where the High Court Mativo J. stated that:-“60. Section 51(11) of the TPA is couched in peremptoty terms. Having correctly found that the decision was made after the expiry of 60 days, the TAT had no legal basis to proceed as it did and to invoke article 159(2) (d). First, there was no decision at all. The decision had ceased to exist by the operation of the law. Second, the provisions of section 51 (11)(b) had kicked in. The Objection had by dint of the said provision been deemed as allowed. Third, the TAT had no discretion to either extent time or to entertain the matter further. Fourth, discretion follows the law and a Tribunal cannot purport to exercise discretion in clear breach of the Law.63. The TAT manifestly erred in law by confusing substantive with procedural law. Article 159(2)(d) of the Constitution in clear terms talks about procedural technicality. A Statutory edict is not procedural technicality. It is a law which must be complied with. Parliament in its wisdom expressly and in mandatory terms provided the consequence of failing to render a decision within 60 days. The Objection is deemed to be allowed. That being the law, the Appellant’s Objection stood allowed as a matter of law the moment the Commissioner of Domestic Taxes failed to render his decision within the 60days. This being the correct legal position, it is my finding that the 1st appeal succeeds.”

53. Accordingly, the Tribunal finds that the Respondent had a statutory obligation to make and communicate a decision within 14 days regarding the Appellant’s application to file late objection.

Final Decision 54. From the totality of the analysis above, the Tribunal proceeds to make the following orders: -a.The Appeal be and is hereby dismissed.b.Each party to bear its own costs.

55. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF NOVEMBER, 2023. GRACE MUKUHA - CHAIRPERSONDR. ERICK KOMOLO - MEMBERJEPHTHAH NJAGI - MEMBERTIMOTHY VIKIRU - MEMBERGLORIA OGAGA - MEMBER