[2023] KETAT 316 (KLR)

Oduor v Commissioner of Domestic Taxes (Appeal 156 of 2022) [2023] KETAT 316 (KLR) (Civ) (19 May 2023) (Judgment)

Neutral citation: [2023] KETAT 316 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 156 of 2022

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

May 19, 2023

Between

Francis Owino Oduor

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a sole proprietor registered in Kenya, trading as Jamboleo East Africa Auto Engineering. His principal activity is repair and maintenance of motor vehicles.

2. The Respondent is the principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995 Cap 469 Laws of Kenya. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government of Kenya for collecting and receiving all tax revenue. Further, under Section 5(2) of the Act as regards performance of its functions under subsection (1), the Authority 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 to assess, collect and account for all tax revenue under those laws.

3. The Respondent issued the Appellant with an additional assessment for VAT on August 4, 2020. The additional assessment was for the period January, April, May, June, December 2017 and July, August, September, October. November and December 2019. This being principal tax of Kshs 2,359,912. 77

4. The Appellant objected to the demand on November 23, 2021 and the Respondent rejected the Appellant’s Late Objection vide its Objection Rejection Notice dated January 20, 2022.

5. Being aggrieved by the Respondent’s decision, the Appellant filed its Notice of Appeal on February 17, 2022 and proceeded to lodge its Memorandum of Appeal and Statement of Facts on even date.

The Appeal 6. The Appeal is premised on the following grounds of appeal set out in the Memorandum of Appeal: -a.That the Respondent erred in law and fact by confirming the assessment without considering the cost of doing business.b.That the Respondent never wrote to the Appellant to inform him on the decision stipulated in Section 51(9) of the Tax Procedures Act that states:“The Commissioner shall notify in writing the taxpayers of the objection decision and shall take all necessary steps to give effect to the decision, including, in the case of an objection to an assessment, making an amended assessment”.c.That the Respondent did not consider that the Appellant was not trading with the PIN (xxxxxxx) under assessment in the periods of the assessments despite the same having been communicated to the Respondent.d.That the Appellant converted into a private limited company Registration Number PVT-xxxxxxx PIN (xxxxxxx) on 2February 3, 2017. All the VAT self-assessments were done on the limited company PIN from this date. However, some of its clients continued withholding VAT on PIN xxxxxxx despite being communicated to about the changes.e.That the Respondent’s assessments are ambiguous and cannot be reconciled against the hanging VAT withholding tax certificates.

7. The Appellant prays that he be given an opportunity to provide all the relevant documents in order to come up with the correct position and that the Tribunal allows the Appeal against the Respondent’s decision dated January 20, 2022.

The Respondent’s Case 8. In its Statement of Facts filed on March 16, 2022, the Respondent has refuted the Appellant’s grounds of appeal and avers as follows: -a.That the additional assessments were based on non-declared business income.b.That Withholding certificates issued were used as the basis of determining the business income.c.That the VAT assessments were reasonable and should therefore be upheld.d.That it is trite that where a taxpayer has failed to submit a tax return for a reporting period in accordance with the provisions of a tax law, the Commissioner may, based on such information as may be available and to the best of his or her judgement, make an assessment (referred to as a “default assessment”) of –a.the amount of the deficit in the case of a deficit carried forward under the Income Tax Act (Cap 470) for the period;b.the amount of the excess in the case of an excess of input tax carried forward orc.the tax (including a nil amount) payable by the taxpayer for the period in any other case.

9. The Respondent prays that: -a.The Appeal be dismissed with costsb.The default assessments dated August 4, 2020 and Objection decision of January 20, 2022 be confirmed.

Submissions of the Parties 10. In his Written Submissions filed on November 9, 2022 the Appellant has submitted on three issues:

Validity of the Objection Decision 11. The Appellant submitted that the Respondent’s actions are arbitrary and violates the Appellant’s right to fair administrative action. Further that the Respondent did not explain to the Appellant the basis of the assessment and further denied the Appellant an opportunity to present documentation in support of the objection. The Appellant submitted further that the Respondent’s rejection notices (Objection Decision) were not accompanied by a statement of findings detailing the reasons for confirmation of the tax liability contrary to Section 51 (9) and (10) of the Tax Procedures Act which provides that: -“(9)The Commissioner shall notify in writing the taxpayer of the objection decision and shall take all necessary steps to give effect to the decision, including in the case of an objection an assessment making an amended assessment.(10)An objection decision shall include a statement of findings on the material facts and the reasons for the decision.”

12. It is the Appellant’s assertion that failure to meet the mandatory provisions of the law means that the Appellant was not notified of the material facts and reasons for the decision contrary to the tenets of the Fair Administrative Actions Act and the spirit of theConstitution on a party’s right to a fair hearing.

13. The Appellant has sought reliance in the TAT Appeal No. 56 of 2016 Minazini Enterprises Ltd vs Commissioner of Domestic Taxes where the Honourable Tribunal observed as follows:“The objection decision issued by the Respondent on 4th April, 2016 did not include a statement of findings and reasons for the decision. The Respondents averments that the audit queries, audit findings and various correspondence as a substitute for a statement of findings or reasons for the decision is not convincing and as such the tribunal does not attach any weight to the reasons so advanced. Indeed, the actions of the Respondent contravene the object and purpose of the Tax Procedures Act as stipulated under Section 2”

Abuse of power 14. The Appellant submitted that it converted from a sole proprietor to a private limited company with effect from 23rd February, 2017 and as such tax for the period under assessment was paid under the Company’s PIN. The Respondent, in its Statement of Facts averred that the tax assessment was based on hanging VAT Withholding certificates yet went ahead to issue assessments at a rate of 16% and not deducting 6% VAT Withheld.

15. The Appellant submitted further that in some months, the Respondent used a formula that is ambiguous to arrive at the assessments; for instance, December 2017 had a total VAT Withholding of Kshs 10,886. 00 whose net amount is Kshs 181,433. 00 which gives a VAT of Kshs 29,029. 00 at 16% and Kshs 18,143. 00 at 10% assuming 6% was allowed. The Respondent however made an Assessment of Kshs 64, 392. 00 based on the hanging withholding certificates as it alleges.

16. The Appellant submitted that the Respondent erred in not taking into account the position in Paragraph 15 above and its action is an attempt to tax the Appellant twice, which is a grave injustice.

17. The Appellant has relied on the case of Republic vs Kenya Revenue Authority Ex-Part Cooper K-Brands Limited (2016) eKLR where the court held that:-“abuse of power is one of the grounds upon which a taxing authority’s power can be challenged and this can be appreciated in Re.Preston (1985) I A.C 835, page 836 paragraph B and C where it was held that: a taxpayer could challenge a decision taken by the commissioners in exercising their statutory powers and duties if he could show that they failed to discharge their statutory duties towards him or they abused their powers”

18. The Appellant averred that as a public agency mandated with assessment and collection of taxes on behalf of the Government of Kenya, the Respondent is required to uphold principles of tax administration including fairness and equity, hence the same income should not be taxed twice. Further that the task of collecting taxes should not be led to discourage taxpayers from carrying on business since this could lead to closing down of business and ultimately no tax. The Appellant averred that there ought to be a balance of both extremes.

Documents produced in support of the Appellant’s position 19. On this issue, and as submitted herein above, the Appellant contends that the Respondent hurriedly confirmed the taxes without considering the Appellant’s documents and explanation. The Appellant submits that the private limited company bank statements showed that the payment withheld in the sole proprietor PIN was paid to the private limited company. Further that the sole proprietor bank statements show that the money was not paid to the sole proprietor.

20. On the allegation of being a non-filer as claimed by the Respondent, the Appellant submitted that the sole proprietor account did not receive any income as all customers made payment to the private limited company account thus there was no income to declare under the individual PIN.

21. To buttress its case, the Appellant has cited TAT No.58 & 126 of 2019 Shreeji Enterprises Ltd vs Commissioner of Investigations and Enforcement where the Tribunal observed as follows;“Although the current law provides that the Appellant prove the tax was paid or that the Respondent’s assessment was wrong……in demanding the production of documents which are not prescribed by legislation the tax authority should be guided by reasonableness, the nature and circumstances of the trade otherwise it would as it occasionally does demand information which the trader cannot produce because he does not have”.

22. The Appellant averred that the Respondent has dealt with him in an unreasonable and unfair manner by ignoring his pleas to review and consider crucial documentation in support of his position. In concluding his submissions, the Appellant prays;a.That the Tribunal finds an invalid Objection Decision was issued and does not meet the mandatory requirements as set out in Section 51(9) (10) of the Tax Procedures Act and is therefore null and void.b.That the Tribunal vacate the erroneous assessment and find that the Appellant has no outstanding taxes.c.That the Tribunal be pleased to issue any further orders favourable to the Appellant as it may deem just and fair to issue.d.That the Respondent to bear costs of the Appeal

23. On its part, the Respondent has only one issue for determination arising from its Written Submissions filed on January 19, 2023.

Whether the Default Assessments dated 4th August 2020 was proper. 24. The Respondent submitted that it is not in dispute that the Appellant was a non-filer with no income from the various business operations declared despite having hanging withholding certificates. However, in exercising its obligations and based on available evidence, being the hanging withholding certificates, the Respondent raised the default assessments against the Appellant on 4th August, 2020

25. The Respondent submitted that the Appellant objected to the assessment out of time and without giving reasons for the late objection.

26. The Respondent submitted that Section 56 (1) of the Tax Procedures Acts places the burden of proof on the Appellant while Sections 23 and 24 of the Tax Procedures Act enjoin all taxpayers including the Appellant to maintain their records and submit tax returns as required by law.

27. It is the Respondent’s submission that under Section 9 of the Tax Procedures Act, every person carrying on business, including the Appellant is obligated to notify the Respondent within 30 days of occurrence of any changes in the business. That the Appellant cannot now use it as a defence to allege that the business had changed and that the Withholding tax was on the wrong PIN. The Respondent contended that indeed the Withholding was on the correct PIN used in the transaction which was not that of the company and in any event, the Appellant had not communicated changes in the business as required of him.

Issues for Determination 28. Having considered the pleadings, evidence adduced and submissions made by the parties, the Tribunal is of the considered view that this Appeal distils into two issues for determination.a.Whether the Respondent’s decision dated January 20, 2022 invalidating the Appellant’s Objection was justified.b.Whether the Default Assessment was justified.

Analysis and Findings 29. Having established the issues for determination, the Tribunal will proceed to analyse them as herein under.

a. Whether the Respondent’s Decision dated January 20, 2022 invalidating the Appellant’s Objection was justified. 30. The Appellant had argued that the Respondent’s Invalidation Notice was not accompanied by a statement of findings detailing reasons for confirmation of the tax liability contrary to the provisions of Section 51 (9) (10) of the Tax Procedures Act, 2015.

31. On its part, the Respondent argued that the Appellant objected to the default assessment out of time and no reason was given hence the invalidation of the same.

32. The Tribunal has observed that the chronology of events was such that the Respondent issued the default assessment on August 4, 2020 and the Appellant objected through I-tax on November 23, 2021 citing the reason that communication was not received on time due to lack of an email password.

33. Section 51 (2) of the Tax Procedures Act, 2015 prescribes the procedure of lodging a notice of objection. It provides as follows:“A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the commissioner within thirty days of being notified of the decision.”

34. The Tribunal has noted that the period between the date of the issuance of the default assessment on 4th August 2020 and the Appellant’s notice of objection on 23rd November, 2021 is more than fifteen months. The Appellant’s notice of objection was therefore filed out of time contrary to the provisions of Section 51 (2) of the Tax Procedures Act, 2015.

35. Section 51 (6) and (7) of TPA however offers remedy to a taxpayer whose notice of objection may be out of time. The said Section provides as follows: -“(6)A taxpayer may apply in writing to the Commissioner for an extension of time to lodge a notice objection.(7)The Commissioner may allow an application for the extension of time to lodge a notice of objection 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.”

36. From the documentation availed by the Appellant in his bundle, the Tribunal has neither sighted any evidence of where the Appellant made any effort to seek for extension of time from the Respondent nor convinced this Tribunal with any valid reason for the inordinate delay. Indeed, equity aids the vigilant and not those who slumber on their rights as the Appellant did.

37. Consequently, the Tribunal finds that the Respondent’s Invalidation Notice dated January 20, 2022 was justified.

38. Having established that the Appellant’s notice of objection was filed out time, the Tribunal will not delve into the other issue as the same has been rendered moot.

Final Decision 39. The upshot of the foregoing is that the Appeal lacks merit and therefore fails. The Tribunal accordingly proceed to issue the following Orders:a.The Appeal be and is hereby dismissedb.The Respondent’s Invalidation decision dated January 20, 2022 be and is hereby upheld.c.Each party to bear its own costs

40. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF MAY 2023. …………………………ROBERT M. MUTUMACHAIRMAN…………………………ELISHAH N. NJERUMEMBER.....................RODNEY O. OLUOCHMEMBER………………………DELILAH K. NGALAMEMBER.........................EDWIN K. CHELUGETMEMBER