[2023] KETAT 893 (KLR)

Pajama Communications Limited v Commissioner of Domestic Taxes (Appeal 1210 of 2022) [2023] KETAT 893 (KLR) (8 December 2023) (Judgment)

Neutral citation: [2023] KETAT 893 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1210 of 2022

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

December 8, 2023

Between

Pajama Communications Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act. It is a registered taxpayer.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA 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 Parts I and II of the First Schedule to the KRA Act for the purposes of assessing, collecting, and accounting for all revenues in accordance with those laws.

3. The dispute arose when the Respondent disallowed withholding tax certificates from Airtel Networks Kenya Limited that had been claimed by the Appellant in its income tax returns for years 2014 and 2015.

4. The Appellant had withholding certificates from Airtel Networks Kenya limited of Kshs. 486,142. 00 for 2014 and Kshs. 436,157. 80 for 2015. The withholding certificates were manual hence not recognized by the iTax platform, the Appellant being unable to claim the withholding tax normally on iTax opted to claim them under Section 42 of the Income Tax Act.

5. On 16th September 2019, the Respondent informed the Appellant that a review of its income tax returns for the years 2014 and 2015 showed that it had claimed Income Tax Credits under Section 42 of the Income Tax Act. The Respondent required the Appellant to provide supporting documents for the claimed credits.

6. On 15th June 2020, the Respondent issued the Appellant with a notice of intention to issue additional assessments and subsequently on 23rd June 2020 the Respondent amended the Appellant’s tax returns and proceeded to issue a demand for taxes of Kshs. 1,678,587. 00 on 25th June 2020.

7. On 21st September 2020, the Appellant filed late notices of objection against the assessments for the years 2014 and 2015.

8. On 27th May 2022 the Respondent rejected the late objection and confirmed the assessment for the reason that supporting documents were not provided.

9. The Appellant, dissatisfied with the Respondent’s decision of 27th May 2022 rejecting its late notices of objection and confirming the assessments, filed its Memorandum of Appeal.

The Appeal 10. The Appeal is premised on the following grounds as set-out in the Appellant’s Memorandum of Appeal dated 14th October 2022 and filed on the same day: -a.That Respondent erred in law and in fact by failing to consider supporting documentation provided by the Appellant.b.The Respondent erred in law and in fact by failing to issue the Appellant with an Objection decision pursuant to Section 51 of the TPA.c.The Respondent erred in law and in fact by failing to recognize the Appellant’s withholding tax certificates and issuing additional assessments when the tax was not due.d.The Respondent erred in law and in fact by assessing and confirming income tax without taking into consideration the expenses that was incurred in the accounting period.

Appellant’s Case 11. The Appellant’s case was premised on the following documents: -a.Its Statement of Facts filed on 14th October 2022 and the documents attached to it; andb.Its Written Submissions filed on 8th September 2023.

12. The Appellant averred that this Appeal relates to income tax returns for the financial years 2014 and 2015 which it filed on 29th June 2015 and on 14th June 2016, respectively, on iTax.

13. The Appellant stated that it had withholding certificates from Airtel Networks Kenya Limited of Kshs. 486,142. 00 for 2014 and Kshs. 436,157. 80 for 2015. It explained that the Withholding certificates which were manual could not be recognized by Itax platform hence could not be claimed.

14. The Appellant averred that being unable to claim for the withholding tax normally on Itax it opted to claim them under Section 42 which resulted into interest of Kshs. 444,800. 00 of 2014 and Kshs. 430,676. 00 in 2015.

15. The Appellant stated that on 15th June 2016 it wrote to the Respondent applying for waiver of interest, a request which was not acted on.

16. The Appellant stated further that on 16th September 2019 the Respondent wrote to it asking for documents (with certificates) to prove the claims yet it had already supplied the documents vide its letter dated 15th July 2016. That it nonetheless provided the documents again.

17. The Appellant stated that on the 23rd June 2020 the Respondent amended its self-assessments returns by disallowing the withholding taxes which resulted into a tax liability. That on the same day the Respondent issued it with additional tax assessments.

18. The Appellant submitted that on 21st September 2020 it objected to the said additional assessment on I-Tax to which the Respondent replied on 27th May, 2022 rejecting the Appellant’s Objection on the ground that the Appellant had not availed enough documentation in support of its late objection.

19. The Appellant argued that contrary to the Respondent’s assertions that it provided insufficient documentary evidence, it had provided withholding tax certificates and receipts.

20. The Appellant relied on the case of Paleah Stores Limited vs. Commissioner of Investigations and Enforcement (Tax Appeal E009 of 2021) [2022] KEHC 249 (KLR) where Majanja J emphasized the importance of providing documents that can be obtained with reasonable diligence. He stated that: -“…the Appellant was not able to substantively explain why it could not attach the same to its appeal and yet these documents belonged to the Appellant and were within the Appellant’s reach. I find that these documents and evidence could have been obtained with reasonable diligence for use before the Tribunal, were within the knowledge of the Appellant and could have produced at the time of the hearing before the Tribunal.”

21. The Appellant stated that it provided all the documents within its reach and made several efforts to gather further documentation from Airtel communications which were futile.

22. The Appellant submitted that the proceedings commenced on the 15th of June 2020 when the notice of intention to issue additional assessment was given. The additional assessments were for the years 2014 and 2015 do not fall within the five-year period as stated in Section 31 of the Tax Procedures Act.“(4)The Commissioner may amend an assessment –(a)in the case of gross or wilful neglect, evasion. Or fraud by, or on behalf of, the taxpayer, at any time; or(b)in any other case, within five years of –(i)for a self-assessment, the date to which the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or(ii)for any other assessment, the date the Commissioner notified the taxpayer of the assessment.

23. That the essence of the five-year rule was highlighted in Republic v Commissioner of domestic taxes ex parte (Large Taxpayers Office) Unilever Tea Kenya Limited as follows: -‘It is clear that the taxpayer is not obliged to keep records relating thereto for more than 5 years. In my view there is a good reason for this. It is not that after 5 years the taxpayer is likely to run out of storage facilities. To my mind the law appreciates that due to financial volatility in business transactions there ought to be a cut-off point so that the business people ought to rest assured that after a certain period of time they will not be unduly harassed hence are at liberty to dispose of their records. To suddenly demand records from taxpayers when the law expressly gives them the liberty to dispose of the same is clearly unreasonable.’

Appellant’s prayers 24. The Appellant prays that the Tribunal: -a.Sets aside the Objection Decision of the Respondent contained in the letter dated 27th May 2022 in its entiretyb.Allow the Appeal with costs to the Appellantc.Issue any other orders that the Tribunal may deem fit.

Respondent’s Case 25. The Respondent’s case is premised on the following documents:a.The Respondent’s Statement of Facts dated 16th November 2022 and filed on 18th November 2022 and the attachments thereto;b.The Respondent’s Written Submissions dated 5th June 2023 and filed on 12th June 2023.

26. The Respondent stated that it conducted a review of the Appellant’s returns for the period 2014 and 2015 and noted that the Appellant had claimed Income Tax Credits under Section 42 of the Income Tax Act of Kshs. 486,142. 00 and Kshs. 436,158. 00 respectively.

27. The Respondent submitted that in its letter dated 16th September 2019 it requested the Appellant to provide evidence supporting the Income Tax Credits claimed, and that the Appellant failed to provide the same forcing it to disallow the credits.

28. The Respondent averred that it notified the Appellant of its intention to disallow the credits and advised the Appellant to claim for refund in compliance with provision of Section 470 if the TPA.

29. The Respondent submitted that following the Appellant’s failure to support its claim under Section 42 of the Income Tax Act, the Respondent issued a demand notice for payment of outstanding taxes amounting to Kshs. 1,678,587. 00 vide its letter dated 25th June 2020.

30. The Respondent reiterated that from the facts stated above, Section 42 of Income Tax is not applicable in this case as it is only applicable in the computation of credits under special arrangements. That Section 42 (1) of the Income Tax Act provides: -“This section shall have effect where under a special arrangement, foreign tax payable in respect of income derived by a person resident Kenya is to be allowed as a credit against tax chargeable in respect of that income.”

31. The Respondent reiterated that none of the amounts claimed by the Appellant were in relation to foreign tax credits nor were the claimed credits in any way related to credits under special arrangements.

32. The Respondent also relied on Section 47 of the Tax Procedures Act which provides that: -“(1)Where a taxpayer has overpaid a tax under tax law, the taxpayer may apply to the Commissioner, in the approved form for a refund of the overpaid tax within 5 years of the date on which the tax was paid.(2)The Commissioner may for purposes of ascertaining the validity of the refund Claimed, subject the claim to an audit.”

33. The Respondent averred that the provisions of Section 47 of the Tax Procedures Act are clear and should be looked at in their ordinary meaning as was guided by the Court in Mangin Vs Inland Revenue Commissioner [1971] AC 39, where the Lord Donavan stated that:-“The words are to be given their ordinary meaning. They are not to be given some other meaning simply because their objective is to frustrate legitimate tax avoidance devices.”

34. That subsequently, after the lapse of timelines provided on 25th June 2020, the Respondent demanded for tax arrears amounting to Kshs. 1,678,587. 00 being Income Tax, PAYE & VAT and advised the Appellant to pay the same within 14 days from the date of the letter failure to which the enforcement measures would be initiated given that it was evident that the credits claimed under Section 42 of the Income Tax with reference to tax paid in foreign country which Kenya has a special arrangement with to provide double taxation relief given that the Respondent had noted that there was no indication that the Appellant had paid any taxes in a foreign country to qualify for such credits.

35. The Respondent stated that the Tribunal in the case of National Bank of Kenya vs. The Commissioner of Domestic Taxes, Tax Appeal No. 474 of 2022 while dealing with similar facts addressed the issues relied on TAT 402 of 2020 Pevans East Africa Ltd-vs-Commissioner of Domestic Taxes, where it stated as follows to quote Justice Odunga in Republic V Kenya Revenue Authority & another Ex-parte Fontana Limited (2014) eKLR: -“In Tanganyika Mine Workers Union vs. The Registrar of Trade Unions (1961) EA 629, it was held that where the provisions of an enactment are penal pensions, they must be construe to its language order to bring people within it ought rather to take care that no-one is brought within it who is not brought within it in express language.”

36. The Respondent posited that the only recourse for the Appellant was to apply for a refund in accordance with the process as laid out in the TPA. That a mere letter or email indicating the Appellant’s intention to offset this amount falls short of the process set out in Section 47 of the Tax Procedures Act.

37. The Respondent relied on the cases of:a.Krystalline Salt Limited VS Kenya Revenue Authority (2019) eKLRb.Republic V Commissioner of Domestic Taxes Large Tax Payer’s Office Ex-parte Barclays Bank of Kenya Ltd (2012) eKLR

38. The Respondent submitted that its actions are in line with the statutory provisions and that the Appellant’s actions were a blatant disregard for the dictates of the law given that the TPA provides a recourse. That the law ought to aid the vigilant and not indolent.

39. The Respondent countered the Appellant’s contention that it 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. It relied on provisions of Section 24 (2) of the TPA which provides that:“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 Taxpayer’s tax liability using any information available to the Commissioner”

40. The Respondent further relied on Section 29 of the TPA which provides that:-“Where a taxpayer has failed to submit a tax return for a reporting period in accordance with the provisions of a tax be available and to the best of his or her judgement, make an assessment (referred to as a ‘default assessment’)

41. The Respondent elaborated that it is allowed to use either direct or indirect methods to determine the income earned by a taxpayer, it quoted the case of Holland Vs United States 121(1954) where the Supreme Court stated that:-“to protect the revenue from those who do not render true accounts, the government must be free to use all legal evidence available to it in determining whether the taxpayer’s books and records accurately reflect his financial history and that the indirect method used need not be exact, but must be reasonable in the light of surrounding facts and circumstances.”

42. The Respondent affirmed that its decision not to allow the Appellant’s late objection was informed by the Appellant’s failure to satisfy the requirements of Section 51(3) of the TPA in lodging its notice of objection.

43. The Respondent cited the case of Afya X-Ray Vs Commissioner of Domestic Taxes wherein the Tribunal emphasised the Appellant’s duty to provide documents.

44. The Respondent stated that it reviewed the Appellant’s late objection application and found that it fell short of the threshold provided for in Section 51(7) of the TPA hence the rejection.

45. In emphasising that the burden of prove that the Respondent’s assessment was either incorrect or excessive lies with the Appellant, the Respondent cited Section 30 of the TAT Act and Section 56(1) of the TPA which place the burden of prove squarely on the Appellant’s shoulders.

Respondent’s Prayers 46. The Respondent prays that the Tribunal finds that:a.The Respondent’s late objection rejection notice and subsequent demand notices are valid and upholds them.b.The Appeal lacks merit and the same be dismissed with costs to the Respondent.

Issues For Determination 47. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issues for determination as follows:a.Whether there is a valid Appeal before the Tribunalb.Whether the Respondent was justified in rejecting the Appellant’s late objection application

Analysis And Findings 48. Having identified the issues that call for its determination, the Tribunal proceeds to analyse them as hereunder.

a.Whether there is a valid Appeal before the Tribunal 49. Records adduced before the Tribunal show that the Respondent amended the Appellant’s tax returns on 23rd June 2020 and issued the Appellant with additional assessments for the years 2014 and 2015 on the same day.

50. The Appellant objected to the additional assessments three months later on 21st September 2020, the Respondent rejected the said objections on 27th May 2022 for having been filed out of time without providing sufficient evidence to support the late objection.

51. The Tribunal notes that the Appellant lodged its Appeals at the Tribunal via a Memorandum of Appeal filed on 14th October 2022. The Appellant did not file a Notice of Appeal.

52. Failure to file a Notice of Appeal contravenes the clear procedures set out in the TAT Act for instituting an Appeal before the Tribunal. Sections 12 and 13 of the TAT Act provide the procedure for appeal. The Sections state that: -“12Appeals to the TribunalA person who disputes the decision of the Commissioner on any matter arising under the provisions of any tax law may, subject to the provisions of the relevant tax law, upon giving notice in writing to the Commissioner, appeal to the Tribunal,Provided that such person shall before appealing, pay a non-refundable fee of twenty thousand shillings.”13 (1)A notice of appeal to the Tribunal shall—(a)be in writing or through electronic means;(b)be submitted to the Tribunal within thirty days upon receipt of the decision of the Commissioner.

53. The Tribunal has held in many occasions that procedure must be adhered to as per the holding in W.E.C. Lines Ltd vs. The Commissioner of Domestic Taxes [TAT Case No. 247 of 2020] where it was held at Paragraph 70 while reiterating the holding in Krystalline Salt Ltd vs KRA [2019] eKLR that: -“Where there is a clear procedure for redress of any particular grievance prescribed by the constitution or an Act of Parliament, that procedure should be strictly followed. Accordingly, the special procedure provided by any law must be strictly adhered to since there are good reasons for such special procedures. The relevant procedure here is the process of opposing an assessment by the Commissioner.”

54. It is the Notice of Appeal that invokes the Tribunal’s jurisdiction, without it the Tribunal has no jurisdiction to determine the dispute. The Tribunal is guided by the case of The Owners of the Motor Vessel “Lillian S”-vs-Caltex Oil (Kenya) Ltd (1989) KLR (as reported in Peter Lai Muthoka-vs-Standard Group [2017] eKLR) Nyarangi J.A., held as follows with regard to jurisdiction:-“Jurisdiction is everything. Without it, a court has no power to make one more step. Where a court has no jurisdiction, there would be no basis for a continuation of proceedings pending other evidence. A court of law downs tools in respect of the matter before it the moment it holds the opinion that it is without jurisdiction.”

55. The Appeal is thus found to be defective for being in contravention of the law and hence the Tribunal lacks the requisite jurisdiction to hear and determine the same.

56. Having entered the above finding the Tribunal did not delve into the other matter that fell for its determination namely; Whether the Respondent was justified in rejecting the Appellant’s late objection application as it had been rendered moot.

Final Decision 57. The upshot of the foregoing is that there is no valid Appeal before the Tribunal and the Tribunal accordingly proceeds to make the following Orders: -a.The Appeal be and is hereby struck out.b.Each party to bear its own costs.

58. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF DECEMBER, 2023. GRACE MUKUHACHAIRPERSONDR ERICK KOMOLOMEMBERJEPHTHAH NJAGIMEMBERTIMOTHY VIKIRUMEMBERGLORIA A. OGAGAMEMBER