[2023] KETAT 503 (KLR)

Ndungu v Commissioner of Domestic Taxes (Tax Appeal 285 of 2022) [2023] KETAT 503 (KLR) (13 October 2023) (Judgment)

Neutral citation: [2023] KETAT 503 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 285 of 2022

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

October 13, 2023

Between

Zacharia Muchiri Ndungu

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a sole trader dealing in grains and other general trade having its operations in Moi‟s Bridge, Uasin Gishu County.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, the Kenya Revenue Authority is charged with the mandate for the assessment, collection, receipting and accounting for all tax revenue as an agent of the Government of the Republic of Kenya. The Authourity is also mandated to administer and enforce all provisions of the statutes set out in in the First Schedule to the said Act.

3. The dispute giving rise to the Appeal herein arose as a result of assessments of returns review on income received from National Cereals and Produce Board (NCPB) and other sources. The Respondent stated that in the month of May 2018, a report in the media alluded to preliminary findings of an internal audit conducted at the NCPB that pointed to allegations of irregular payments made to a few traders from the money set aside to pay farmers for maize deliveries to replenish strategic grain reserves, which matter was picked by EACC for investigations soon after the publication of the media reports.

4. The Respondent stated that preliminary information it obtained from EACC indicated that NCPB payments had paid of about Kshs. 1 Billion to maize traders instead of maize farmers, and indicated that NCPB had received 28,560 maize deliveries equivalent to Kshs. 11,365,879,919. 00 from 10,636 farmers in the 2017-2018 season, out of which Kshs. 7,027,830,141 had been paid as at 17th May 2018. The total outstanding payments were Kshs. 4,338,049,778 amounting to 77% of the payments related to six depots namely Eldoret, Moi‟s Bridge, Kitale, Bungoma, Nakuru, and Kisumu out of 110 depots countrywide.

5. The Respondent also started that the focus of the investigation targeted the top 67 beneficiaries- of the payments and the Appellant was one of such beneficiaries.

6. Subsequently the Appellant was issued with a Notice of Tax Investigation Findings and a Notice to Appear under Section 61 of the TPA on 21st January 2019.

7. On 19th August 2020 the Respondent raised additional assessments and on 30th September issued the Appellant with a notice of assessment for Kshs 9,490, 995 .00 as income tax for the years of income 2016 and 2017.

8. The Appellant lodged his objection application against the Respondent„s assessment on 15th September 2020, and lodged another objection notice on iTax on 24th September 2020.

9. Subsequently the Appellant‟s objection was rejected by the Respondent on 31st May2021.

10. The Appellant dissatisfied with the Respondent‟s objection decision file the Appeal herein on 21st March 2021.

The Appeal 11. The Appellant filed its Memorandum of Appeal on 21st March 2022 and set out the following grounds of appeal;i.That the Commissioner of Domestic Taxes erred in law and fact by charging income tax on interbank transfers made to other bank accounts held by the proprietor during the year ended 31st December 2016 and 2017. ii.That the Respondent erred in law and fact by not according the Appellant the opportunity to deduct expenditure wholly and exclusively incurred in the production of income contrary to Section 15 (1) of the Income Tax Act.

The Appellant‟s Case 12. The Appellant has set out its case on its Statement of Facts dated 17th March 2022, and filed on 21st March 2022.

13. The Appellant stated that the Respondent did an estimated assessment on the Appellant for the year of income 2016 and 2017 and issued an assessment notice requiring him to pay Kshs. 9,170,055. 91 for income tax arising from the variance between the turnover as per income tax and bank deposits.

14. The Appellant stated that he wrote to the Respondent on 24th September 2020 and objected to the assessments after which the Respondent contrary to the Appellant‟s legitimate expectation, wrote to the Appellant confirming the assessment on 31st May 2021.

15. The Appellant stated that the Respondent never at any other time wrote to him concerning the objection notice in terms of its validity as provided for under Section 50 (3) & (4) of the TPA, and therefore the objection was valid.

16. The Appellant submitted that the Respondent erred in law and fact by charging income tax on inter bank transfers made to the other bank accounts held during the year ended 31st December 2016 and 2017.

17. The Appellant averred that he endeavors to pay the principal tax not in dispute in the sum of Kshs. 915,767. 00 only.

18. By reason of the forgoing submissions the Appellant prayed that the Tribunal sets aside the Respondent‟s objection decision and allow its Appeal.

The Respondent‟s Case 19. The Respondent has set out its case on;a.The Statement of Fact dated 20th April 2022 and filed on the same date together with the documents attached thereto; andb.The written submissions dated and filed on 2nd March 2023.

20. The Respondent stated that the Appellant was subjected to tax investigations as his payments were part of the beneficiaries made by NCPB and were flagged by EACC for investigation.

21. The Respondent stated that the Appellant during the year 2017 made deliveries to NCPB of 29,069 of 50 kg bags, and 16,149 of 90 kgs bags of maize all totaling Kshs 51,129,334. 00 and failed to file income tax self-assessment returns for the years 2013 to 2017.

22. The Respondent further stated that the Appellant was issued with assessments on 9th September 2020 for Kshs. 9,170,055. 00 to which he objected on 15th September 2020 (on iTax on 24th September 2020).

23. The Respondent also stated that the Appellant failed to provide supporting records to support his grounds of objection as required under Section 51 (3) of the TPA and the Respondent subsequently rejected the objection on 31st May 2021 hence confirming the assessments.

24. The Respondent submitted that the bank deposits into the bank accounts indicated that all the deposits and withdrawals were either cash deposits by the Appellant or bank transfers from another account to the other and as such the Respondent‟s view was the deposits constitute trade receipts.

25. The Respondent also submitted that the accounting for expenses were not allowed in the assessment since the Appellant had not provided supporting documents or any other evidence in line with Section 51 (3) of the TPA which provides for validity of objection. The Respondent buttressed it submission with the case of Kotile General Contractors Co Ltd v Commissioner of Domestic Taxes (2020) eKLR where it was held that:-“13. As provide by the above section , the taxpayer upon receiving notification from the Respondent that its notice of objection was deemed invalid had one recourse ; to appeal to the Commissioner. Once the appeal to the Commissioner was considered and a decision reached , then the applicant would have recourse to lodge an appeal before the Tribunal . Until such a process was followed , the application at hand is premature and therefore fails .”

26. In addition, the Respondent submitted that Section 24 (2) of the TPA allows the Commissioner to assess tax based on the available information in case the taxpayer fails to amend the returns and provide documents necessary for the determination of the due tax liability.

27. The Respondent further submitted that the determination of the tax liability depends on submission of necessary records by the Appellant.

28. The Respondent further submitted that in line with Section 73 (2) (b) of the Income Tax Act, the Commissioner is vested with power under reasonable cause to determine to his best judgement, the amount of income of that person and assess accordingly. It cited the case of Prima Rosa Flowers Ltd v Commissioner of Domestic Taxes (2019) eKLR and proffered that the Respondent exercised its right within the law.

29. The Respondent submitted that contrary to the Appellant‟s averments in its Statement of Facts, the disallowed assessments were improperly claimed and did not meet the threshold provided for under the TPA as the disallowed inputs were not supported by the required documents envisaged by Section 59 of the TPA.

30. The Respondent therefore submitted that in the absence of records, the Appeal has no merit and ought to be dismissed.

31. By reason of the foregoing submissions the Respondent prayed that the Appellant„s Appeal be dismissed with costs.

Issues for Determination 32. The Tribunal having carefully reviewed and considered the pleadings and submissions filed by the parties is of the considered view that the Appeal herein distils into two issues for determination;i.Whether the Respondent's Objection decision was validly issued.ii.Whether the Respondent's assessment against the Appellant was justified.

Analysis and Determination i. Whether the Respondent‟s Objection Decision was validly issued. 33. The dispute subject of this Appeal arose out of an assessment prompted by the Respondent‟s investigations of the Appellant‟s tax declarations in which it indicated that during the year 2017 the Appellant made deliveries to NCPB valued at Kshs. 51,129,334. 00 culminating with a tax assessment of Kshs. 9,490,995. 00.

34. The Respondent consequently issued a notice of assessment to the Appellant on 30th September 2020, to which the Appellant objected to on 15th September 2020 (on iTax 24th September 2020) which was acknowledged by the Respondent on 24th September 2020.

35. The Respondent in its objection decision on 31st May 2021 on the basis that the Appellant failed to provide supporting documents for their objection as required under Section 51 (3) of the TPA and rejected the Appellant‟s objection.

36. The Appellant dissatisfied with the Respondent‟s objection decision preferred the Appeal herein.

37. The Appellant has contended that following the acknowledgement of receipt of his objection notice on 24th September 2020, the Respondent did not at any time write to him, communicate with him or request for further information whatsoever, until issuance of the objection decision.

38. The Appellant has contended that in view of the Respondent „s indolence, its objection was allowed by operation of the law pursuant to the provisions of the TPA.

39. It is noteworthy that though this issue has been pleaded by the Appellant, the Respondent has not proffered any response or an any way canvassed the issue, leaving the same unresponded to.

40. Gleaning from the lodgment dates stamped on the subject documents, it is clear to the Tribunal that the Respondent having received and acknowledged the Appellant‟s notice of objection on 24th September 2020, the Respondent had up to sixty days within which to issue its objection decision, provided there was no further request for additional supporting information. This gave the Respondent time up to 24th November 2020 to render it objection decision.

41. The Tribunal notes that the Respondent did not exercise its prerogative under Section 51 (3) & (4) of the TPA as regards the validity of the objection notice, but laid on its laurels until 30th May 2021 when it issued its decision, which was six months (183 days) late, beyond the prescribed statutory period.

42. Section 51 (11) of the TPA provides that:-“(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of objection or the last date of further documentation requested by the Commissioner.”

43. The Tribunal is satisfied that there was no request from the Respondent for further information after receipt of the notice of objection. The Respondent therefore ought to have issued its decision by 24th November 2020.

44. By issuing the objection decision on the 30th May 2021, the Respondent was in breach of the provisions of Section 51 (11) of the TPA.

45. The Tribunal consequently finds and holds that the Appellant‟s notice of objection was allowed by dint of the provisions of Section 51 (11) of the TPA.

46. The Tribunal having found the Appellant„s notice of objection was allowed by operation of the law, renders the second issue moot and the Tribunal will not delve into the determination of the same.

Final Decision 47. The upshot of the foregoing is that the Appeal succeeds and the Tribunal accordingly proceeds to make the following Orders;i.The Appeal be and is hereby allowed.ii.The Respondent‟s objection decision dated 30th May 2021 be and is hereby set aside.iii.The parties to bear their own costs.

48. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 13TH DAY OF OCTOBER, 2023ROBERT M. MUTUMA - CHAIRPERSONELISHA N. NJERU - MEMBERMUTISO MAKAU - MEMBERBONIFACE K. TERER - MEMBERDR. WALTER ONGETI - MEMBER