[2024] KETAT 726 (KLR)

Ndaka v Commissioner of Legal Services & Board Co-ordination (Appeal 165 of 2023) [2024] KETAT 726 (KLR) (9 May 2024) (Judgment)

Neutral citation: [2024] KETAT 726 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 165 of 2023

Grace Mukuha, Chair, Jephthah Njagi, E Komolo, W Ongeti & G Ogaga, Members

May 9, 2024

Between

Titus T. Ndaka

Appellant

and

Commissioner of Legal Services & Board Co-ordination

Respondent

Judgment

Background 1. The Appellant is an individual taxpayer based in Matuu Town, Machakos County whose business is rental of residential properties.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority 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. On 9th June 2022, the Respondent issued the Appellant with a letter of“intention to issue assessment for the undeclared rental income for the period January 2016 to April 2022. ”

4. On 21st December, 2022, the Respondent issued additional assessments to the Appellant on income tax return for the period January 2016 to December 2016.

5. On 5th January 2023, the Appellant objected to the assessment order on the iTax platform and received an acknowledgement.

6. On 16th January 2023, the Respondent sent an email to the Appellant asking for four documents to support the objection.

6. On 31st January 2023, the Respondent issued its objection decision.

7. Aggrieved by the decision of the Respondent, the Appellant filed this Appeal on 24th February 2023.

The Appeal 9. The Appeal is premised on the Memorandum of Appeal dated 24th February 2023 and filed on the same date raising the following grounds: -a.The Respondent erred in law and in fact by issuing the Appellant with two conflicting decisions.b.The Respondent erred in law and in fact by failing to consider supporting documentation provided by the Appellant.c.The Respondent erred in law and in fact by failing to issue the Appellant with reasons for its objection decision pursuant to Section 51 of the Tax Procedures Act.d.The Respondent erred in law and in fact by demanding rental income whereas the property was vacant and the Respondent filed NIL returns.e.The Respondent erred in law and in fact by assessing and confirming income tax without taking into consideration the expenses that were incurred in the accounting period.

Appellant’s Case 10. The Appellant’s case was premised on the Appellant’s Statement of Facts dated and filed on 24th February 2023.

11. The Appellant averred that the Respondent issued him with a notice of assessment dated 9th June, 2022 for the period 2016.

12. That the Respondent issued the Appellant with a demand notice for Kshs. 539,338. 50 and requested for provision of documents if not in agreement.

13. That on 13th October, 2022 the Appellant provided the Respondent with the documents requested.

14. That on 16th October, 2022 the Respondent acknowledged receipt of the documents.

15. The Appellant averred that the Respondent filed NIL returns on 15th December, 2022 for rental monthly income for the Appellant without his engagement for the months of March 2022 and April 2022.

16. That on 15th December 2022, the Respondent registered payments for monthly rental income for the months of March 2022 and in April 2022, the Respondent issued demand notice demanding for the above taxes.

17. That on 20th December 2022, the Respondent issued additional assessment for the months of January 2017, February 2019, March 2020 and April 2022.

18. That the above additional assessments did not make sense since they were scattered with no justifications or explanations.

19. That the Appellant has been declaring and paying all rental income. That when the property was vacant, the Appellant filed NIL returns as required by the law.

20. That on 21st December 2022 the Respondent issued additional assessment for financial years 2016, 2017, 2018, 2019, 2020 and 2021.

21. That on 7th January, 2023 the Appellant objected to additional assessments for the year 2016 and requested for a meeting to have the issues explained since the accusations were overwhelming and to try to understand what was being demanded of him.

22. That on 26th January, 2023 the Appellant objected to additional assessment for the year 2017, 2018, 2019, 2020 and 2021.

23. That the Respondent erred in law and in fact by issuing the Appellant with two conflicting decisions one dated 31st January 2023 and another dated 3rd February, 2023 on the same subject property and tax.

Appellant’s Prayers. 24. The Appellant made the following prayers to the Tribunal: -a.That Respondent’s objection decision dated 31st January 2023 be annulled and set aside in its entirety.b.That the Tribunal issues an Order directing the Respondent to consider the documents requested by the Respondent and supplied by the Appellant.c.That the Appellant's objection on iTax be allowed by operation of the law.d.That the Appeal be allowed with costs to the Appellant.e.That the Respondent should not issue agency notices to the Appellant’s bankers.f.Any other orders that the Tribunal may deem fit.

Respondent’s Case 25. The Respondent’s case is premised on the following documents filed with the Tribunal:-a.The Respondent’s Statement of Facts dated 9th May 2023 and filed on the same date together with the documents attached thereto.b.The Respondent’s Written Submissions dated 26th September 2023 and filed on 27th September 2023.

26. In response to the first ground of Appeal, the Respondent averred that it was not aware of the two conflicting objection decisions alleged by the Appellant.

27. Further, in response to grounds 2 to 5 in the Appellant’s Memorandum of Appeal, the Respondent averred that the additional assessments were made upon review of the Appellant’s returns where discrepancies were noted.

28. The Respondent averred that it is empowered to use its best judgement to arrive at a tax decision as provided for in Section 30(1) of the Tax Procedures Act which states:-“Subject to subsection (2), the Commissioner may, based on the available information and to the best of his or her judgement, make an assessment (referred to as an "advance assessment") of the tax payable by a taxpayer specified in section 26 for a reporting period.”

29. The Respondent stated that pursuant to Section 56 of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, the burden of proof lies on the Appellant to demonstrate that the Respondent's decision was incorrect.

30. The Respondent stated that this burden was not discharged as no documentary evidence was availed to the Respondent to enable it come to a different conclusion on the Appellant’s liabilities.

31. That the Respondent relied on the Appellant's self-assessments and not incomplete nor erroneous records in assessing the Appellant. That therefore, the Appellant's ground 5 that the Respondent overlooked purchase and other expenses incurred in the administration of the business is spurious since the Appellant had the window of providing documents to support his objection.

32. That the Appellant cannot fault the Respondent for relying on the available records to assess and confirm assessments after several failed attempts to acquire the necessary records. That the Appellant is suffering the consequences of not keeping accurate documents.

33. That Section 31(1) of the TPA 2015 provides for amendment of assessments:-“Subject to this section, the Commissioner may amend an assessment (referred to in this section as the "original assessment") by making alterations or additions from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that-(a)------------(b)------------c.in any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.”

34. That the Appellant's original assessment for the income tax self-assessments, depicted existence of substantial income.

35. The Respondent averred that the objection decision was issued within the confines of Section 51(3) of the TPA which requires that all the relevant documents supporting the objection be submitted to the Respondent.

36. That Section 51 of the Tax Procedures Act states that:-“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 in dispute under section 33(1); andc.all the relevant documents relating to the objection have been submitted.”

37. The Respondent averred that it asked the Appellant to furnish the relevant documents but the Appellant did not provide any evidence that would have altered the assessments.

38. That Section 56 (1) of the Tax Procedures 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. The Section provides:-“In any proceeding under this Part the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

39. That further, the Appellant upon being requested for supporting documents on various dates, failed to provide the crucial documents. That as a result, the assessment was made based only on the available information provided by the Appellant and the best judgement of the Respondent.

40. That Section 59 (1) of the Tax Procedures Act empowers the Respondent to require production of such documents vide issuance of notice as deemed necessary in determination of a tax liability. The Section provides:-“For the purpose of obtaining full information in respect of the income of a person or class of persons, the Commissioner or an authorized officer may require any person, by notice in writing to--------a.produce for examination by the Commissioner at the time and place specified in the notice, any accounts, books of account, and other documents which the Commissioner may consider necessary; and the Commissioner may inspect such accounts, books of accounts or other documents and may take copies of any entries therein.”

41. That the Respondent issued an assessment based on the information provided and in light of the inconsistencies within the Appellant's documents.

42. The Respondent submitted that the Appellant was misguided in lodging this Appeal since the objection decision was given after review of the supporting documents provided by the Appellant.

43. The Respondent submitted that it has the power to assess any taxpayer's tax liability by virtue of Section 24(2) of the Tax Procedures Act, 2015 which provides as fol1ows:-“The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a tax liability using any information available to the Commissioner.”

44. That further, the Appellant was assessed in accordance with Section.31(1) of the Tax Procedures Act that provides:“Subject to this section, the Commissioner may amend an assessment (referred to in this section as the "original assessment") by making alterations or additions,· from the available information and to the best of the Commissioner's judgement. to the original assessment of a taxpayer for a reporting period to ensure that-a..... ;b..... in the case of an excess amount of input tax under the Value Added Tax Act, 2013 (No. 35 of 2013), the taxpayer is assessed in respect of the correct amount of the excess input tax carried forward for the reporting period;c...... In any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.”

46. The Respondent submitted that in the case of the Commissioner for Her Majesty’s Revenue and Customs TC/2017/02292 Saima Khalid Appellant Vs the Commissioners for Her Majesty’s Respondents Revenue & Customs at paragraph 29 the Tribunal set out the following requirements for a decision to be to the best of HMRC's judgment as follows:“...the very use of the word ‘Judgment’ makes it clear that the commissioners are required to exercise their powers in such a way that they make a value judgment on the material which is before them...Secondly, clearly there must be some material before the commissioners on which they can base their judgment. If there is no material at all it would be impossible to form a judgment as to what tax is due.Thirdly, it should be recognised, particularly bearing in mind the primary obligation, to which I have made reference, of the taxpayer to make a return himself, that the commissioners should not be required to do the w01·k of the taxpayer in order to form a conclusion as to the amount of tax which, to the best of their judgment, is due. In the very nature of things frequently the relevant information will be readily available to the taxpayer, but it will be very difficult for the 6 commissioners to obtain that information without carrying out exhaustive investigations. In my view, the use of the words 'best of their judgment' does not envisage the burden being placed on the commissioners of carrying out exhaustive investigations. What the words 'best of their Judgment' envisage, in my view, is that the commissioners will fairly consider all material placed before them and on that material, come to a decision which is one which is reasonable and not arbitrary as to the amount of tax which is due. As long as there is some material on which the commissioners can reasonably act then they are not required to carry out investigations which may or may not result in further material being placed before them."

47. The Respondent submitted that the information available to it was that there was under declaration by the Appellant on the income it received of rental income from both residential and commercial properties.

48. That based on the above information, the Respondent applied the best judgment in computing the assessment. That the information available to the Respondent was subjected to the provisions of the Income Tax Act and found wanting.

49. That upon objection of the additional assessments, the Respondent requested the Appellant for audited accounts for the period, certified bank statements, general ledger and trial balance for the period to facilitate the objection review process.

50. The Respondent submitted that the Appellant did not provide any documents, and in the absence of the documents to support his objection, the Respondent could not come to a different conclusion in issuing its objection decision.

51. That in the case of the Commissioner of Domestic Taxes V Galaxy Tools Limited [2021] eKLR, the Court quoted the case of Metcash Trading Limited Vs Commission for the South African Revenue Service and Another case CCT 3/2000 and stated the following on the burden of proof;“But the burden of proving the Commissioner wrong then rests on the vendor under section 37, Because VAT is inherently a system of self-assessment based on a vendor's own records, it is obvious that the incidence of this onus can have a decisive effect on the outcome of an objection or appeal. Unlike income tax, where assessments can elicit genuine differences of opinion about accounting practice, legal interpretation or the like, in the case of a VAT assessment, there must invariably have been an adverse finding by the Commissioner and by like token such a finding would usually have entailed a rejection of the truth of the vendor's records, returns and averments relating thereto. Consequently, the discharge of the onus is a most formidable hurdle facing a VAT vendor who is aggrieved by an assessment unless the Commissioner's precipitating credibility finding can be shown to be wrong, the consequential assessment must stand.”

52. The Respondent submitted that in the instant Appeal, the Appellant was granted more than sufficient time to produce documents that would address the issues raised in the assessment.

53. That the numerous correspondences that the parties engaged in are a testament to that fact and have been attached to the Respondent's Statement of Facts.

54. That further, the documents that the Appellant was required to provide were expected to be in his possession pursuant to Section 23(1) of the Tax Procedures Act.

55. That Section 23(1)(b) of the TPA provides that a person:-“(b)Maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained.”

56. The Respondent relied on Section 51(8) of the Tax Procedures Act which provides that:“Where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part or disallow it and Commissioner's decision shall be referred to as an ‘objection decision’"

57. That the failure to provide the Commissioner with complete records as requested crippled the Appellant's objection.

58. The Respondent submitted that the Appe1lant was granted sufficient time to ensure that he provided all the necessary documents to support his objection fully and the Respondent proceeded to confirm the assessments.

Respondent’s Prayers. 59. The Respondent prayed that: -a.The Tribunal upholds the Respondent’s objection decision dated 31st January 2023 as proper and in conformity with the provisions of the law.b.That this Appeal be dismissed with costs to the Respondent as the same is devoid of any merit.

Issues For Determination 60. The Tribunal has considered the facts of the matter and the submissions made by the Respondent and identified the following to be the issues for determination in this matter: -a.Whether the Respondent erred in law and in fact by issuing an assessment for year 2016, which period was outside the statutory timeline provided by the law.b)Whether the Appellant discharged its burden of proof.

Analysis And Findings 61. Having identified the issues that fall for its determination, the Tribunal proceeds to analyze them as hereunder.a.Whether the Respondent erred in law and in fact by issuing an assessment for year 2016, which period was outside the statutory timeline provided by the law.

62. The genesis of this Appeal is a letter dated 9th June 2022, issued by the Respondent to the Appellant on the “intention to issue assessment for undeclared rental income for the periods January 2016 to April 2022. ”

63. The Respondent issued additional assessments to the Appellant on 21st December 2022 on income tax return for the period January 2016 to December 2016.

64. The Appellant objected to the assessment order on the iTax platform on 5th January 2023 and received an acknowledgement.

65. On 16th January 2023, the Respondent sent an email to the Appellant asking for four documents to support the objection and issued its objection decision on 31st January 2023.

66. Aggrieved by the decision of the Respondent, the Appellant filed this Appeal on 24th February 2023.

67. The Tribunal notes that the instant Appeal only relates to the tax dispute for the year 2016 and that Section 23(1)(c) requires a taxpayer to keep records for a period of 5 years. The Section provides that:-“subject to subsection (3), retain the documents for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in the law.”

68. The Tribunal further notes that Section 29 (5) of the TPA states that:-“Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.”

69. The only time that Respondent is allowed to assess beyond the five years period is in a situation where there is “gross or wilful neglect, evasion or fraud by a taxpayer.”

70. Since the law allowed the Respondent to assess the taxpayer for a period of not more than 5 years, the Tribunal notes that the earliest the Respondent should have gone back was year 2017 as it did not allege “wilful neglect, evasion or fraud” by the taxpayer.

71. The Tribunal reiterates its holding in a similar matter TAT Appeal number 411 of 2021, City Gas East Africa v Commissioner of Investigations & Enforcement where Tribunal held that the Respondent erred in assessing the Appellant for a period longer than five years when there was no evidence of wilful neglect or fraud.

72. The Tribunal is also guided by the High Court holding in Tax Appeal No E033 of 2020 Commissioner of Domestic Taxes V Unga Limited where Justice DS Majanja held at paragraph 41:-“Under Section 29 of the TPA, the Commissioner is empowered to make a default assessment when a taxpayer fails to file a tax return. This power is however limited in time to five years under section 29(5) thereof. There is thus an expectation that the Commissioner would move with haste in doing so before the statutory timeline expires.”

73. Based on the statute and case laws cited above, the Tribunal finds that the Respondent erred in law and in fact by issuing assessment for year 2016, which period was outside the statutory timelines of five years provided by the law.

74. Having found that the assessment for year 2016 was issued outside the legal timeline, the Tribunal did not delve into the other issue that fell for its determination as it was rendered moot.

Final Decision 75. The upshot of the foregoing is that the Appeal succeeds. Consequently, the Tribunal makes the following Orders: -a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 31st January 2023 be and is hereby set aside.c.Each party to bear its own costs.

75. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF MAY, 2024. GRACE MUKUHA - CHAIRPERSONJEPHTHAH NJAGI - MEMBERDR. ERICK KOMOLO - MEMBERDR. WALTER MEMBER - J. ONGETIGLORIA A. OGAGA - MEMBER