[2023] KETAT 268 (KLR)

Nakuru Cosmetics Centre Limited v Commisioner Domestic Taxes (Appeal 549 of 2021) [2023] KETAT 268 (KLR) (Commercial and Tax) (12 May 2023) (Judgment)

Neutral citation: [2023] KETAT 268 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Appeal 549 of 2021

E.N Wafula, Chair, RM Mutuma, RO Oluoch & EK Cheluget, Members

May 12, 2023

Between

Nakuru Cosmetics Centre Limited

Appellant

and

Commissioner Domestic Taxes

Respondent

Judgment

Background 1. The appellant is a private limited company whose principal place of business is in Nakuru town.

2. The Respondent is a principal officer appointed under section 13 of the Kenya Revenue Authority Act, cap 469 of the 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 revenues. Further, under section 5 (2) of the Act with respect to the performance of its functions under subjection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in part 1 & 11 of the First Schedule of the Act for the purpose of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The respondent issued a pre-assessment notice based on the variance arising from the appellant’s filed annual returns and the VAT monthly returns dated the August 24, 2020 to demand for additional VAT of Kshs 5,954,209. 00 for the years 2017, 2018 and 2019.

4. The appellant objected to the pre-assessment notice vide its letter dated the 7th of September 2020.

5. The appellant forwarded the documents requested by the appellant vide a letter dated the October 22, 2020. This letter was acknowledged and confirmed to have been received by the Respondent.

6. The respondent subsequently issued a VAT assessment order of Kshs 4,917,385. 00 for 2017 and Kshs. 1,249,702. 00 for 2018 on the 17th of March 2021.

7. The appellant filed its objection to this assessment through the iTax system on the 25th of May 2021 and the same was acknowledged as received on the same day.

8. The respondent responded to the objection vide an email on the 21st of July 2021 where it advised the appellant that its notice had been invalidly lodged because it did not provide the relevant documents required.

9. The appellant responded vide a letter dated the 28th of July 2020 stating that its objection was filed within time and that it had previously supplied the documents which the respondent had even relied on to set aside the 2019 pre-assessment order. It further explained that its ETRmachine had broken down and it could thus not provide the ETR print out required, and that the Commissioner had been informed of this breakdown vide a letter dated the 2nd of June 2020.

10. The Commissioner responded to this letter vide its letter dated 2nd of June 2020 where it advised the Appellant that it was required to repair the ETR machine within 2 days. The record is not clear on how long it took the appellant to repair the ETR machine

The Appeal 11. The appellant filed a memorandum of appeal dated September 6, 2021 and filed on September 17, 2021 in which it raised the following grounds of Appeal:-a.The respondent erred in fact by stating that the appellant had underdeclared his VAT for the period 2018. b.The respondent erred in the estimation of 2017 VAT by including sales not made by the Applicant.c.The Respondent erred in selectively allowing the explanation given by the Appellant and ignoring the same facts in the other period.d.The Respondent should be estopped from denying the facts that it authored and posted the appellant income tax self -assessment for the period 2017 and 2018. e.The respondent decision is excessive and punitive bearing in mind that the variance arose from the position taken by the Appellant in declaring income which was inclusive of VAT while the Respondent VAT exclusive sales figure giving rise to the variance.

The Appelant’s Case 12. The appellant’s case is premised on its statement of facts dated September 6, 2021 and the written submissions dated May 25, 2022.

13. The appellant identified the following issues for determination and it made its submissions along those issues as follows:

a. Whether the Respondent Erred in Fact by Stating That the Appellant Had Under-Declared Its Value Added Tax for The Period of 2018 and 2017 14. The appellant submitted that it discharged the burden of proof that was placed on it by illustrating that it had paid value added tax as required.

15. The appellant contended that it submitted the annual accounts audited by the external auditor to the respondent. These returns were inclusive of sales while the figures used in assessment by the respondent were exclusive of Value Added Tax hence the variance in computation figures. It relied on the South African case of Metcash Trading Limited v Commissioner for the South African Revenue service andanother Case of Metcash Trading Limited v commissioner for the South African revenue service andanother case CCT 3/2000 to support this argument.

16. The appellant contended that the 2019 pre-assessment order of 2019 financial year ought to bind the respondent. It also argued that the assessment of tax for the 2017 and 2018 years of income would amount to double taxation.

b. Whether the Appellant’s Objection Was Valid. 17. The Appellant submitted that:a.It made a valid objection on the September 7, 2020 and also provided the evidence required. That it was the respondent who never gave an objection decision. It should thus be estopped from issuing the further assessments given on March 25, 2021 and May 25, 2021 regarding the tax period of 2018 and 2017 years, respectively.b.It submitted its adjusted trial balance and audited financial statements on the 22nd of October 2020 in response to a request from the appellant made on the 7th of September 2020. c.Its objection met the test set by Nyamu in the Nairobi H. C, Miscellaneous Civil Application No 534 of 2007 of Arrow Hi-Fi (EA) Ltd v Kenya revenue Authority & 2 others cited in the case of Judicial Review Application No 599 of 2017 Republic v Kenya Revenue Authority Ex Parte M-Kopa Kenya Limited(2018) eKLRat paragraph 103 where it was stated that for an objection to be valid it must satisfy the description of a counter offer as understood in the law of contract or constitute a clear and complete answer to the assessment in a manner that can bind the Kenya Revenue Authority.d.The demand notices were illegal because the respondent ignored the appellant’s financial statements for the 2017 and 2018 period.

c. Whether the Decision Is Appealable to The Tax Appeals Tribunal. 18. The appellant submitted that :a.The point of contention is not the tax decision but rather the fact that the Respondent never considered the objection by the Appellant in making further assessment for the 2017 and 2016 periods of income.b.The Tribunal is the right forum to address issues arising under any tax law as is provided for in section 12 of the Tax Appeals Tribunal Act.

d. Whether the Unclear Communication in Correspondences Was Prejudicial to The Appellant. 19. The Appellant submitted under this heading as follows:a.That the different correspondences from the Respondent brought about uncertainty to the Appellant because it was unsure of which amount to defend or object. This was contrary to article 47(1) of the Constitution of Kenya, 2010 and section 4(1) and 6(4)(1) of the Fair Administrative Action Act.b.That the correspondences by the respondent to the appellant were not clear which figures to defend. That the figures varied in each correspondence. That the respondent’s letter dated August 24, 2020, indicated a tax liability amount of Kshs. 4,217,738/= for 2017 period, Kshs. 971,663/= for the period of 2018 and Kshs.764, 807 for 2019. That the respondent’s letter dated September 21, 2020 indicated a tax liability of Kshs. 4,597,334. 9/= for the 2017 period. The respondent’s letter dated October 29, 2020 indicated a tax liability of Kshs. 1,249,702. 33/= for the 2018 period including incremental liability without penalties. That the assessment orders issued on May 17, 2021 indicated a total tax liability of Kshs. 4,917,385/= for the 2017 period including incremental liability without penalties.c.That the respondent failed to meet its obligation of fair administrative action as interpreted by Majanja J. in the case of Geothermal Development Company Limited v Attorney General & 3 others Petition 352 of 2012 at Para 31 in which he expressed himself as follows:“A notice of the nature issued to enforce collection of taxes must clearly state to be such a notice state the amount claimed, state the legal provision under which it is made and draw the taxpayer’s attention to the consequences of failure to comply with the law and the opportunity provided by the law to contest the finding. Such a notice would give the opportunity to any Kenyan to know the case against it and utilize the legal provisions to contest the decision. The right to fair administration action and the right of access of justice now enshrined in our Constitution demand nothing less.”e.Whether Penalties and Interest Ought to Accrue.

20. The Appellant submitted that:a.The respondent acted maliciously in issuing further assessments despite the appellant’s objection to the pre-assessment.b.The respondent erred in doing further assessment and in failing to apply the reasons provided for the 2019 financial period to the 2017 and 2018 financial periods.c.It carried out a self-assessment on the tax that was due to the Appellant.d.It duly submitted tax returns as required by the Tax Procedures Act hence being subjected to tax decision requiring payment of damages was punitive and contrary to section 24 (1) and (2) of the TPA.e.The penalties should not accrue because no taxes were due to the Commissioner from the Appellant’s self-assessment.

Appellant’s Prayer 21. The Appellant prays that:a.The confirmed assessment be annulled in total or varied in such a manner as may appear just and reasonable with the facts.b.The matter be referred back to the station for alternative dispute resolution (ADR) after the due process referred above is concluded.

The Respondent’s Case 22. The Respondent defended this appeal vide its statement of facts dated and filed on the 8th of October 2021 and the written submissions dated and filed on the 30th of May 2022.

23. The Respondent’s response was that:a.It undertook a compliance check on the appellant’s tax affairs for the years of income 2017, 2018 and 2019. As a result of the compliance check the respondent noted variances between sales declared in the VAT3 and income tax returns and audited accounts.b.It communicated the results of the compliance check and demanded the additional VAT assessments vide its letters dated September 21, 2020 and October 29, 2020,c.The appellant failed to pay the demanded taxes. It also did not offer sufficient explanation as to why the demanded taxes were not payable and consequently, the respondent on March 17, 2021 and May 17, 2021 issued additional assessments for the years 2018 and 2017, respectively.d.Whereas the appellant’s objection to the 2017 additional tax demand was issued on time both the appellant’s objections for the year 2017 and 2018 were not compliant with the provisions of section 51(3) of the Tax Procedures Act which require that a notice of objection should precisely state the grounds of objection, the amendments required to be made to correct the decision and the reasons for the amendments.e.The Respondent confirmed its additional assessments on July 23, 2021 when the appellant failed to file a proper objection and having failed to provide the relevant documentary evidence as expected in section 30 of the Tax Appeals Tribunal Act read together with section 56 of the Tax Procedures Act.f.There was no confusion in the amounts demanded as alleged by the appellant. The only difference is that in the assessment demand interest and penalties were included while in the objection decision it is only the principal tax that was captured.

24. The Respondent identified the following 3 issues for determination in this matter from where he responded as follows:

a) Whether the Respondent erred in fact by stating that the Appellant had under declared its VAT for the periods assessed. 25. The respondent relied on the variances which were noted between the sales declared by the appellant in the VAT3, Income tax returns and the audited accounts. It asserted that its figures were obtained from appellant’s documents. That the burden of proof that the assessment was erroneous lay with the appellant.

b) Whether the Respondent erred in fact and law in confirming the additional assessment against the Appellant’s objection while ignoring all the other facts. 26. The respondent stated that:a.It allowed the appellant the chance to pay the demanded taxes and or offer sufficient explanation as to why the same are not payable. The appellant however, failed to pay the demanded taxes nor offer sufficient explanation as to why the same are not payable.b.The appellant was granted sufficient time and opportunity to furnish the respondent with sufficient documentary evidence to support its objection, but it failed to do so.c.The appellant failed to file a proper objection whose composition is provided for under section 51(3) of the Tax Procedures act as hereunder:-“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if:-a.the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;b.in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not dispute under Section 33(1); andc.all the relevant documents relating to the objection have been submitted.”

27. Based on the above, the Appellant stated that it did not err in its confirmation of the additional assessment.

c. Whether the Respondent’s decision to demand extra taxes was excessive and punitive. 28. Under this head the respondent relied on the following cases which have emphasized that the burden of proof in tax matters lie with the taxpayer:a.Commissioner of Documents of Domestic TaxesvGolden Acre Limited (2021)eKLRb.The Australian case of MulheimvCommissioner ofTaxation (2013) ECAFC 115.

29. It was its argument that the appellant had failed to prove that the respondent erred in issuing its objection decision dated the 23rd of July 2021.

Respondent’s Prayer 30. The Respondent prayed that this honourable tribunal.a.Dismisses this appeal with costs to the Respondent.b.Upholds the respondent’s additional VAT tax assessment dated July 23, 2021 for the years of income 2017 and 2018.

Issues for Determination 31. Flowing from the above facts the Tribunal has identified the following issues for determination in this dispute:a.Whether the appellant’s objection was validly lodgedb.Whether the respondent’s VAT tax assessment dated the 23rd of July 2021 for the 2017 and 2018 years is valid and lawful.

Analysis and Findings 32. The fact that the Appellant’s objection was invalidly lodged was communicated vide an email dated the 21st of July 2021 and followed up with a letter dated the 23rd of July 2021. The ground of invalidation was that the appellant had not provided the documents required, namely:a.Certified audited accountsb.Original and certified bank statements.c.ETR reports for the period under assessmentd.Purchase schedulee.Expense schedule.

33. A previous email from the respondent dated the 29th of September 2020 had also requested the appellant to supply the following documents:a.Sales and purchase ledgersb.VAT register/spreadsheetsc.VAT control accountd.Audited accountse.Monthly ETR-Z reportsf.Adjusted trial balance

34. The appellant responded vide letter dated 22nd October 2020 wherein it attached the following documents:-a.Adjusted trial balanceb.Audited financial statements.

35. The Appellant also wrote a letter dated the 2nd of June 2020 informing the commissioner that its ETR Machine was faulty and that it would share the receipts once the ETR machine is ‘rectified’

36. The Commissioner responded vide a letter dated the 2nd of June 2020(same day) advising the appellant that the machine ought to be repaired within 2 days.

37. There is no trail of evidence confirming and or showing that the Appellant supplied any other documents to the Respondent.

38. The Respondent subsequently issued its objection decision dated the 23rd of July 2021 wherein it also stated that the ETR reports for the period under assessment periods had not been provided. This meant that appellant’s ETR machine had not been repaired and it remained faulty for a curious period of 1 year and 40 days or a cumulative period of about 405 days.

39. It’s instructive to note that the appellant never provided the following documents as at the 23rd of July 2021 when the objection decision was issued:-a.Original and certified bank statements.b.ETR reports for the period under assessmentc.Purchase scheduled.Expense schedule.

40. Apart from the reason provided for its failure to provide the ETR reports which was that the ETR machine was under repair for a cumulative period of 405 days, no reason was provided on why the other documents that had been requested by the Respondent were never supplied.

41. The relevant portion of the Act that deals with this issue is section 51(3) of the TPA which provides as thus:-“A notice of objection shall be treated as validly lodged by taxpayer under subjection 2 if –a.the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reason for the amendments.b.in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1)c.all the relevant document relating to the objection have been submitted.”

42. From the foregoing and the evidence tabled before the Tribunal it is thus clear that:-a.The parties herein were in constant communication in regard to this assessment wherein the last communication between them was recorded on the 25th of May 2021 when the respondent acknowledged what was recorded as the appellant’s objection application in the iTax system.b.The Appellant breached section 51(3) (c) of the TPA by its failure to supply the required documents and or to explain why it could not provide them.c.The burden of proof lay with the appellant to prove that its notice of objection had complied with section 51(3) of the TPA. This burden of proof was never discharged.

43. The Tribunal has recently held in TAT No 554 of 2021 (NRB) Wob Solution Limited v Commissioner of Legal Service & Board Co-Ordination that a notice that is not validly lodged is invalid and unsustainable in law.

44. Accordingly, the Tribunal finds and holds that that the appellant’s objection was not validly lodged for reasons that it contravened the mandatory provisions of section 51(3) (c) of the TPA.

45. Having held that the Appellant did not lodge a valid notice of objection, the remaining issue that fell for determination has been rendered moot and shall therefore not be considered by the Tribunal.

Final Decision 46. On the basis of the foregoing analysis the Tribunal finds that the Appeal lacks merit and accordingly proceeds to make the following Orders: -a.The appeal be and is hereby dismissed.b.The respondent’s invalidation objection decision dated the 23rd of July 2021 be and is hereby upheld.c.Each party to bear its own costs.

47. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 12TH DAY OF MAY, 2023. ………………………ERIC N. WAFULACHAIRMAN……………………………ROBERT M. MUTUMAMEMBER……………………………RODNEY O. OLUOCHMEMBER………….………………..EDWIN K. CHELUGETMEMBER