[2023] KETAT 998 (KLR)

Nuru Palace Hotel Limited v Commissioner of Domestic Taxes (Tax Appeal 949 of 2022) [2023] KETAT 998 (KLR) (15 September 2023) (Judgment)

Neutral citation: [2023] KETAT 998 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 949 of 2022

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

September 15, 2023

Between

Nuru Palace Hotel Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act and is a registered taxpayer. Its principal business is in the hotel and hospitality sector, in 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. The Respondent observed that there were variances between the sales declared in the Appellant’s VAT returns and income tax returns for the years 2018 and 2019.

4. On 3rd February 2022, the Respondent notified the Appellant to amend its return for the year 2019. Subsequently, the Respondent issued the Appellant with income tax assessments for the periods 2018 on 25th November 2020 amounting to Kshs. 2,941,794. 00 and 2019 on 8th January 2021 amounting to Kshs. 8,427,999. 00.

5. On 3rd June 2021, the Appellant objected to the said income tax assessments for the years 2018 and 2019.

6. On 15th November 2021, the Respondent issued an objection decision confirming the income tax assessments for the periods 2018 and 2019.

7. Aggrieved by the Respondent’s Objection decision dated 15th November 2021, the Appellant lodged a Notice of Appeal dated 12th August 2022 and filed on even date.

The Appeal 8. In its Memorandum of Appeal dated 25th August 2022 and filed on 2nd September 2022, the Appellant premised its Appeal on the following grounds;-i.The learned assessing officer erred in law and in fact in the confirmation of additional assessment against the objections of Appellant while the following facts were clear.a.That the additional assessments had raised by disqualifying the Investment Deduction Claim for construction of the Hotel, Conference, Office Block and lodging Facilities for the years 2016-2017. b.That the assessing officer computed additional income tax for the years 2018 and 2019 out of an estimate whereas the financial statements for the company portray a different profit.c.That the additional assessment of Kshs. 8,427,999. 00 in 2019 and Kshs. 2,941,794. 00 for 2018 considered did not consider the above issues.ii.The learned assessing officer erred in law and in fact by not considering the type of enterprise and use of asset.iii.That the learned assessing officer erred in law and in fact by not, considering information and explanation provided by the Appellant.iv.That the learned assessing officer erred in law and in fact by failing to put into further consideration documents and explanations provided confirming actual documentation for the said period provided by the Appellant.

The Appellant’s Case 9. The Appellant laid out its case in its Statement of Facts dated 31st August 2022 and filed on 2nd September 2022.

10. The Appellant averred that it had been filing its annual returns as required by law save for the years 2018 and 2019 which it failed to submit returns due to its director’s medical condition.

11. The Appellant stated that the Respondent through its Regional Audit unit (RAC) conducted an audit and compliance check whereupon it issued the Appellant with additional assessments amounting to Kshs. 8,427,999. 00 for the year 2019 on 8th January 2021 and Kshs. 2,941,794. 00 for 2018 on the 25th November 2020.

12. The Appellant submitted that it made an objection to the additional assessments for the years 2018 and 2019 on 3rd June 2021.

13. The Appellant stated that on 15th November 2021 the Respondent issued an Objection decision confirming the earlier amounts.

14. The Appellant averred that it had not received the Objection decisions until 8th June 2022 when it received a call from its bankers informing it that the bank had received an agency notice. That it is only upon inquiring why the agency notices were put in place it was furnished with a copy of the decision made by the Independent Review of Objection.

15. The Appellant submitted that financial statements and records in relation to 2018 and 2019 are available to justify correct income and expenditure.

16. The Appellant stated that it has already made payments amounting to Kshs. 1,100,000. 00 as uncontended amounts relating to the years in question.

The Appellant’s Prayersa.That the Appeal be allowed.b.That the confirmation of the Commissioner be set aside and it be reviewed.

The Respondent’s Case 17. The Respondent premised its case on the following documents before the Tribunal:a.The Respondent’s Statement of Facts dated 30th September 2022 and filed on 4th October 2022. b.The Respondent’s written Submissions dated 31st March 2023 and filed on even date.

18. The Respondent averred that having observed variances between the sales declared in the Appellant’s VAT returns and income tax returns for the years under review, it notified the Appellant to amend its return.

19. The Respondent stated that the Appellant did not provide a response to the pre-assessment notice. That consequently, the Respondent on 25th November 2020 and 8th January 2021 issued additional income tax assessments for the periods 2018 and 2019, respectively, based on the unexplained variances.

20. The Respondent averred that on 3rd June 2021, the Appellant lodged a late objection to the additional tax assessments.

21. The Respondent stated that it issued an objection decision on 15th November 2021 confirming the additional income tax assessments amounting to Kshs. 2,941,794. 00 for 2018 and Kshs. 8,427,999. 00 for 2019.

22. The Respondent averred that the decision to arrive at the assessments was justified and had a basis in law as required under the Tax Procedures Act, 2015.

23. The Respondent contended that it is not bound by the Appellant’s returns or self-assessment and it is empowered to vary the assessments using any available information in its possession as provided by Section 24 of the TPA.

24. The Respondent further averred that Section 31 of the TPA empowers it to make alterations or additions to original assessments from available information for a reporting period based on the Commissioner’s best judgment.

25. The Respondent submitted that it relied on its own best judgment based on information available to it in compliance with Section 31 of the TPA while raising the additional income tax assessments. It relied on Commissioner of Domestic Taxes V Altech Stream (EA) Limited [2021] eKLR where the court stated that Section 31 of the TPA allows the Commissioner to make an assessment based on such information as may be available and to the best of its judgment.

26. The Respondent reiterated that the additional income tax assessments were raised because, despite the Appellant being informed of the variance between the sales declared in its VAT returns and income tax returns for the years under review, it failed to amend its return.

27. The Respondent asserted that concerning the application for extension of time to lodge a late objection, the Appellant did not avail any evidence in support of the claim that its accounting system had failed and that it took time for its technicians to restore the system hence it could not access the required information to file an objection on time.

28. The Respondent submitted that it rejected the Appellant’s late objection because the reason provided did not meet the threshold of Section 51(7) of the TPA on any other reasonable cause.

29. The Respondent submitted that the Appellant has come before this Tribunal with unclean hands because despite being requested on several occasions to provide reasons and evidence for late objection it failed to do so.

30. The Respondent further averred that the Appellant failed to discharge its burden of proof as required by Section 56(1) of the TPA since it failed to demonstrate that the Respondent’s income tax assessment was incorrect.

31. To buttress its averment, the Respondent relied on Ushindi Exporters Limited V Commissioner of Investigation and Enforcement (Tax Appeals Tribunal No. 7 of 2015) where the Tribunal held that:“The burden of proving that the tax assessment is excessive or should have been made differently never shifts to the Respondent and is placed squarely on the Appellant as Section 30 (a) and (b) of the Tax Appeals Tribunal Act states:a.Where an appeal related to an assessment, that the assessment is excessive; orb.In any other case, that the tax decision should not have been made or should have been made differentlyBy purporting to shift the burden of proving that the tax assessment against it was incorrect or should have been made different the Appellant failed in discharging the burden, placed upon it by law”

32. The Respondent urged the Tribunal not to give the Appellant audience as it filed this Appeal in an attempt to bar the Respondent from collecting the tax due.

The Respondent’s Prayers 33. The Respondent prays that the Tribunal:a.Upholds the Respondent’s additional income tax assessment as proper and in conformity with the provisions of the law.b.Dismisses this Appeal with costs to the Respondent as the same is devoid of any merit.

Issue For Determination 34. Gleaning through the Memorandum of Appeal, the parties’ Statement of Facts and the Respondents’ submissions, the Tribunal puts forth the following issue for determination:a.Whether the Objection Decision dated 15th November 2021 was proper in law.

Analysis And Findings 35. The Tribunal having identified the issue for its determination analyzes it as herein-under.

36. The Objection decision of 15th November 2021 confirming the assessments for the years 2018 and 2019 was in response to an objection application dated 3rd June 2021 objecting to assessments made on 25th November 2020 and 8th January 2021, respectively.

37. The dispute at hand relates to variances noted by the Respondent in the VAT self-assessment returns of the Appellant and its income tax returns for the years 2018 and 2019.

38. However before delving into the substance of the dispute, the Tribunal takes cognisance of the fact that Section 51 of the TPA provides clear timelines within which such issues must be ventilated by the parties.

39. The Appellant lodged a late objection to the assessments dated 25th November 2020 and 8th January 2021 on 3rd June 2021, stating that it only got to know of the assessments when an agency notice was served to its bankers on 3rd June 2022.

40. The Respondent did not invalidate the objection for being out of time but rather it proceeded to render an objection decision on 15th November 2021 confirming its assessments four months after the objection was lodged.

41. The Respondent having received the Appellant’s late objection without invalidating it was bound to issue an objection decision within 60 days pursuant to Section 51(11) of the TPA which stated then that:“The Commissioner shall make the objection decision within sixty days from the date of receipt of—a.the notice of objection; orb.any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed”

42. In making its determination, the Tribunal is guided by the case of Total Kenya Limited v Kenya Revenue Authority; Barclays Bank of Kenya Limited & 2 others (Interested Parties) [2020] eKLR wherein the Court clarified without an iota of doubt the effect of an Objection that had been deemed as allowed by operation of law in the following terms:-“24. Furthermore, it is pertinent to note that according to Section 51(11) of the TPA, where the Commissioner fails to make an objection decision within sixty days of the notice of objection, the objection shall be allowed. In line with the provision, the Petitioner’s objection to the Respondent’s demand for the amount of Kshs. 72,426,128/= stood allowed upon the lapse of sixty days from the date of receipt of the objection and the Respondent was no longer authorized to pursue the amount from the Petitioner.”

43. Further, in the Case of Equity Group Holdings Limited vs Commissioner of Domestic Taxes [2021] eKLR, the High Court emphatically stated that a decision relating to an objection by the Commissioner after the expiry of 60 days is null and void. 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’s a law which must be complied with. Parliament in it’s 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.”

44. Guided by Section 51(11) of the TPA and the authorities cited above, the Tribunal finds that the Appellant’s objection had been deemed allowed by operation of the law at the lapse of the statutory period of 60 days from the date of the objection hence the Respondent’s objection decision and confirmation of assessments are null and void.

Final Decision 45. The upshot to the foregoing analysis 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 Objection Decision dated 15th November 2021 be and is hereby set aside.c.Each party to bear its own costs.

DATED AND DELIVERED AT NAIROBI THIS 15TH DAY OF SEPTEMBER 2023GRACE MUKUHA...............CHAIRPERSONTIMOTHY VIKIRU................MEMBERGLORIA OGAGA...................MEMBERJEPHTHAH NJAGI.................MEMBER