[2023] KETAT 323 (KLR)

Ndururi v Commissioner of Domestic Taxes (Tax Appeal 509 of 2022) [2023] KETAT 323 (KLR) (19 May 2023) (Judgment)

Neutral citation: [2023] KETAT 323 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 509 of 2022

RM Mutuma, Chair, D.K Ngala, EN Njeru, EK Cheluget & RO Oluoch, Members

May 19, 2023

Between

Peter Paul Mburu Ndururi

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is an individual who owns a commercial property in Thika town which earns rental income.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act Cap 469 laws of Kenya. Under Section 5 (1) of the Act, the Respondent 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 function under subsection (1), the Respondent 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 purposes of assessing, collecting and accounting for all revenue in accordance with those laws.

3. On 28th March 2018, the Respondent issued the Appellant with a pre-assessment demand notice for Kshs 3,105,610. 00 being principal tax of Kshs 2,388,338. 08 penalty of Kshs 477,667. 62 and interest of Kshs 239,436. 70.

4. On 10th May 2018, the Respondent issued a tax demand based on undeclared sales as claimed by various purchasers who had claimed VAT input from the Appellant.

5. Vide a letter dated 31st January, 2022 and received on 2nd February, 2022 the Appellant applied to the Respondent to make a late objection citing the Appellant’s medical reasons. The Respondent granted the Appellant’s request vide its letter dated 4th March, 2022 reminding the Appellant what a valid objection should entail in reference to Section 51 (3) of the Tax Procedure Act (TPA). The Appellant was given up to 11th March, 2022 to lodge a valid objection as prescribed under Section 51(3).

6. The Appellant provided some documentation vide its letter dated 10th March, 2022. The Respondent sought for more documentation after which it issued a Notice of invalidation vide its letter dated 19th April, 2022 informing the Appellant that the objection dated 2nd February 2022 stood invalidated due to failure to provide the requisite documents. The notice also confirmed the assessment.

7. Being aggrieved by the Respondent’s decision, the Appellant filed its Notice of Appeal on 16th May, 2022 and lodged its Memorandum of Appeal and Statement of Facts on 18th May, 2022.

The Appeal 8. The Appeal is premised on the following grounds of appeal as set out in the Memorandum of Appeal: -a.That the additional VAT tax assessment confirmed by the Commissioner of Domestic Taxes is erroneous, excessive and in dispute.b.That the Respondent erred in law and fact by not giving the Appellant an opportunity to be heard before raising the additional VAT tax assessment on 28th March 2018. c.That the Respondent erred in law and fact by failing to exercise its statutory mandate to protect the Appellant from fraudulent activities in the VAT iTax account by suppliers falsifying that taxable goods and services had been supplied to them and ignoring the plea made by the Appellant that no such supplies had been done.d.That the Respondent erred in law and fact by misusing powers provided by Section 31 (c) of the TPA in raising the additional assessment in the month of November 2014 whereas the listing for the purported VAT sales invoices not marching those claimed by purchasers as provided by the Respondent were for year 2017. e.That the Respondent erred in law and fact by demanding payment from the Appellant for the non-agreed VAT additional assessment.f.That the Respondent erred in law and fact by failing to consider the ill health of the Appellant and to accord a fair hearing as enshrined in the Constitution of Kenya 2010.

9. The Appellant therefore prayed that this Tribunal.a.Strikes off the Commissioner’s decision to issue an additional assessment of the VAT for the month of November 2014. b.Award the Appellant the cost of this Appeal.

The Respondent’s Case 10. In response to the Appellant’s Appeal, the Respondent has addressed these grounds in its Statement of Facts filed on 30th May, 2022 and reiterates its position as stated in the Notice of Invalidation communicated to the Appellant on 19th April, 2022 and responds as follows;a.That the confirmation of the additional VAT assessment was legal and that it is mandated as per Section 31 (1) of TPA to amend self-assessment of a taxpayer and that the timelines within which the Respondent is allowed to amend a taxpayer’s self-assessment is provided for under Section 31 (4) of the TPA.b.That in making such an assessment, it is authorized to use the information in its possession and is not bound by the returns filed by the taxpayer as provided for in the aforementioned Section 31(1) and Section 24 of the TPA.c.That it used the information availed to it by those who purchased the Appellant’s supplies to amend the Appellant’s assessment to reflect the VAT output that had not been declared by the Appellant. It then communicated this assessment to the Appellant in compliance with Section 31 of the TPA.d.That it was the duty of the Appellant, upon receiving the assessment to provide the necessary documents to show the Respondent that the assessment was erroneous as provided for under Section 56(1) of the TPA. Thus the Appellant failed to comply with Section 51 (3) of the TPA by failing to prove that the assessment was excessive.e.That the Appellant was given a fair opportunity to be heard. A case in point is that despite the fact that the Appellant made an objection which was more than 3 years late, the Respondent considered the Appellant’s reasons for the delay and allowed the late objection and that the Appellant was reminded on 4th March, 2022 to provide bank statements, sales invoices, and sales ledgers for the grounds of objection. This was to ensure the Appellant would be heard on the merits of its claims. However, the Appellant only provided invoices and refused or neglected to provide any further information. As such there was fair opportunity for hearing.f.That it is the Appellant who had the necessary information to show the alleged fraud and help the Respondent protect him. The duty to keep records and to maintain full and true written record of every transaction is provided for under Sections 43(1) and 23, respectively.g.That the claims made by the Appellant that he had not made the supplies to the purchasers were not substantiated by the necessary documents. As such the Respondent cannot be faulted for confirming the assessment.h.That it did not abuse Section 31 (c) of the TPA as this provision was not relied upon at all. The relevant provision for amendment of VAT self-assessment in this context is Section 31 (b). That Section 31 (c) deals with any other tax while Section 31 (b) deals with adjustment for the VAT input tax, which the proper subject matter refers.i.That it is upon the Appellant to show that tax decision was wrong and given that the Appellant failed in this endeavour, the Respondent had no choice but to confirm the assessment.j.That in the light of the provisions of the relevant legislation, the Appellant was given a fair hearing and granted leave to object out of time on account of sickness. The Appellant was also given enough time from 2nd February to 11th March 2022 to provide the necessary documents to support its objection.

11. The Respondent prays that this Tribunal finds;a.That the Respondent’s Notice to invalidate the objection and the consequent confirmation of the VAT assessment of Kshs 2,388,338. 08 for the period of November 2014 was proper in law and in conformity with the Constitution, the VAT Act and the Tax Procedures Act.b.That this Appeal be hereby dismissed with costs to the Respondent as the same is without merit.

Submissions of the Parties 12. In his Written submissions filed on 8th February 2023, the Appellant submitted on two issues;Whether the Respondent was justified to issue a demand notice without hearing the Appellant’s case

13. The Appellant averred that the Respondent disregarded the Appellant’s right to be heard and unjustly issued an additional VAT assessment on 28th March, 2018 for purportedly undeclared VAT for the month of November 2014 amounting to Kshs 3,105,610. 40 being principal tax, penalties and interest.

14. With regard to being denied a hearing by the Respondent, the Appellant has relied on the case of Republic vs Kenya Revenue Authority Ex Parte Mary W. Kamau & Another (2012) eKLR in which Githua J held as follows;“As noted earlier, it is apparent from the facts of the instant case that the Applicants were not heard on their objection before the tax assessed earlier was considered as a final assessment and Agency notices were issued to enforce its recovery. This in my view denied the applicants the opportunity to be heard on their position that the tax as assessed by the Respondent was erroneous as it was allegedly not in conformity with financial records held by them… ”

15. The Appellant also made reference to the case of Municipal Council of Mombasa vs Republic & Umoja Consultants Ltd Civil Appeal No 185 of 2004 as well as Article 47 of the Constitution and submitted that he was rightfully entitled to fair administrative action from the Respondent herein being a public administrative body yet failed to abide by the legislative requirements and as such the decision to serve agency notices upon the Appellant’s bankers was procedurally unfair, illegal and illegitimate. That the Respondent acted prematurely and contrary to the above mentioned provisions of the law and violated the rules of natural justice and express statutory provisions and as a consequence of which the orders of certiorari sought herein ought to be issued.

Whether the Respondent erred in law and fact by raising additional assessment of VAT on the Appellant 16. The Appellant submitted that during his illness, its Tax Agent took advantage of the situation and forged the Appellant’s books of accounts which the Appellant verily believed was so as to be able to make VAT refund claims. The Appellant further submitted that he did not ratify the actions of the Tax Agent neither did he know the acts of omission or commission by the Agent as he was sick during the time.

17. To exonerate himself from the offences of the Agent, the Appellant has relied on Section 103 (1) (3) of the TPA which provides for offences by employees, agents and companies as follows;(1)“If a person acting as an employee or an agent commits an offence under a tax, law that person’s employer or principal shall be treated as having also committed the offence(3)Subsection (1) or (2) shall not apply to a person if –a)The offence was committed without that persons consent or knowledge, andb)That person, having regard to the nature of that person’s functions and all the circumstances, has exercised reasonable diligence to prevent the commission of the offence”

18. The Appellant submitted that he was able to prove that his tax Agent engaged in fraudulent activities to the Appellant’s detriment. The Appellant therefore prayed that this Appeal be allowed.

19. In its written submissions filed on 8th February, 2023 the Respondent did not raise any issues for determination. It however reiterated its response as stated in its Statement of Facts. The Tribunal will therefore not belabour the same arguments.

Issues for Determination 20. Having considered the pleadings, documentation availed and the submissions made, the Tribunal is of the considered view that this Appeal raises two issues for determination.a.Whether the Respondent’s Notice of invalidation dated 19th April 2022 is proper in law; andb.Whether the Respondent erred in law and fact in raising the Additional Assessment

Analysis and Findings 21. The Tribunal will now proceed to analyse the said issues as herein under: -

a. Whether the Respondent’s Notice of Invalidation dated 19th April 2022 is proper in law 22. The Respondent had asserted that the assessment was based on undeclared sales as claimed by various purchasers who had claimed VAT input from the Appellant. On his part, the Appellant argued that during the time he was indisposed, his Tax Agent took advantage of his illness to engage in some fraudulent activities using the Appellant’s particulars to enable him make VAT refund claims for his benefit.

23. The Tribunal notes that the Respondent made the demand for tax on 10th May, 2018. However, the Appellant through its Agent wrote to the Respondent vide a letter dated 31st January 2022 and filed on 2nd February, 2022 requesting to lodge the notice of objection out of time due to the Appellant’s health challenges. That this request was accepted by the Respondent vide its letter dated 4th March, 2022.

24. Section 51 (6), (7) & (7A) provides for a situation where an Appellant wishes to object to the Respondent’s objection out of time. It 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; andb)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 decision.”

25. In the case of Equity Group Holding Limited vs Commissioner of Domestic Taxes (Civil Appeal E069 & E025 of 2020) KEHC 25 eKLR (Commercial and Tax (23 Aug 2021) the court held in regards to compliance with mandatory statutory provisions as follows:-“The word shall, when used in a statutory provision imported a form of command or mandate. It was not permissive, it was mandatory. The word shall in its ordinary meaning was a word of command which was normally given a compulsory meaning as it was intended to devote obligation. Shall was used to express a command or exhortation or what was legally mandatory.”

26. The Tribunal has observed that in applying to lodge the notice of objection out of time, the Appellant was able to prove his reason of poor health which the Respondent considered and accepted. However, Section 51(7A) of TPA is couched in mandatory terms. The Appellant’s application to file his notice of objection out of time was dated 31st January, 2022 and received on 2nd February, 2022. The Respondent accepted the Appellant’s request vide the Respondent’s letter dated 4th March,2022 and asked him to provide documents by 11th March, 2022. The Appellant provided the document on 10th, March, 2022. The Respondent then issued a Notice of Invalidation on 19th April, 2022. The Respondent has made mention of an email correspondence of 6th April, 2022 asking the Appellant to avail further documents. However, the Respondent has not adduced it to buttress its argument, the Tribunal will therefore not consider it.

27. Section 51(4) of TPA provides for the time lines to invalidate a notice of objection which is not validly lodged. It provides as follows: -“Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall within a period of fourteen days notify the taxpayer in writing that the objection has not been validly lodged”

28. From the chronology of events, the Appellant provided the documents sought on 10th March, 2022 and the Respondent’s Notice of Invalidation of the Objection was done on 19th April, 2022. In the absence of any proof of correspondence from the Respondent in the intervening period, it ought to have responded by 24thth March, 2022. Its response on 19th April, 2022 was therefore more than fourteen days out of time. In the circumstances, the Appellant’s notice of objection is therefore deemed proper in law.

29. In view of the foregoing the Tribunal finds that the Respondent’s Notice of Invalidation dated 19th April, 2022 was not proper as it offends mandatory statutory provisions. The Respondent ought to have reviewed the notice of objection on its merits and issued an appropriate Objection decision.

30. With the Respondent’s notice of invalidation having been deemed as a nullity for breach of a mandatory statutory provision, the Respondent is enjoined to consider and make a finding on merit in respect of the Appellant’s notice of objection. The Appellant will upon the issuance of the Objection decision make an appropriate decision to vindicate his interests depending on the outcome and such Objection decision is to constitute an appealable decision.

31. Having determined that the Respondent’s notice of invalidation was not proper in law, the Tribunal will not delve into the second issue as the same has been rendered moot.

Final Decision 32. The upshot of the above is that the Appeal is meritorious and the Tribunal accordingly proceeds to make the following Orders;a.The Appeal be and is hereby allowed;b.The Respondent’s Notice of Invalidation dated 19th April, 2022 be and is hereby set aside;c.The matter is hereby referred back to the Commissioner to consider the Appellant’s notice of objection dated the 31st January, 2022 in proper merits and proceed to issue an appropriate Objection decision within sixty (60) days of the date of delivery of this Judgment.d.Each party to bear its own costs.

33. It is so ordered

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF MAY, 2023. ROBERT M. MUTUMA - CHAIRPERSONDELILAH K. NGALA - MEMBERELISHAH N. NJERU - MEMBEREDWIN K. CHELUGET - MEMBERRODNEY O. OLUOCH - MEMBER