[2024] KETAT 722 (KLR)

Petrocity Enterprises Limited v Commissioner for Domestic Taxes (Appeal 221 of 2023) [2024] KETAT 722 (KLR) (17 May 2024) (Judgment)

Neutral citation: [2024] KETAT 722 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 221 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, T Vikiru & AK Kiprotich, Members

May 17, 2024

Between

Petrocity Enterprises Limited

Appellant

and

Commissioner for Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited company registered to deal in fuel products and the provision of effective logistics. It has also invested in the infrastructure of service stations to enable it to conduct its business optimally.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act. Under Section 5 (1) of the Act, the Kenya Revenue Authority (the Authority) is an agency of the Government for the collection and receipt of all tax revenue.

3. The Respondent carried out a verification exercise on the Appellant’s capital expenditure and issued its findings vide a letter dated 13th December 2022 wherein it disallowed the Appellant’s claim for commercial building allowance at a rate of 25% on a straight line amounting to Kshs 405,577,842. 00 for the years 2015 to 2019.

4. The Respondent later issued further communication on the 19th of December 2022 stating that the rate applicable for commercial buildings in 2020 was 10% of the residential value and not 25% on a straight-line basis that applied in the previous period of 2015 to 2019.

5. The Appellant objected to the Respondent’s finding regarding the disallowance of capital allowance for the years 2015 to 2019 vide its letter dated 22nd February 2023.

6. The Respondent issued its objection decision on the 28th April 2023.

7. Aggrieved by the Objection decision, the Appellant filed its Appeal vide a Notice of Appeal dated and filed on 5th May 2023.

The Appeal 8. The Appellant set out its Appeal in its Memorandum of Appeal dated and filed on 12th May 2023 and itemized the following as its grounds of Appeal, that:a.The Respondent in assessing the rate applicable on the capital expenditure of the Appellant on commercial buildings incurred for the period 2017 to 2019 at 10% of the residual values of the said buildings has wholly and completely misapprehended the changes made by the Tax Laws (Amendment) Act No. 2 of the Second Schedule of the Income Tax Act.b.The Respondent has misinterpreted the charges made by the Tax Laws (Amendment) Act No. 2 of 2020 to the Second Schedule of the Income Tax Act in failing to appreciate that the said law provides for investment allowance to be computed at the rate of 10% of the qualifying capital expenditure as from the 25th April 2020 and not 10% of the residential value of a commercial building.c.The Respondent has wholly misapprehended the law by failing to find that the changes made to the Second Schedule of the Income Tax by the Tax Laws (Amendment) Act No. 2 of 2020 cannot apply retrospectively to take away the rights acquired by the Appellants under the previous law and attach new disabilities on the Appellant with regard to events already past.d.The Respondent has misapprehended the law by imposing an adverse tax obligation on the Appellant while failing to appreciate that the Tax Laws (Amendment) in making changes to the Second Schedule of the Income Tax Act did not provide transition provisions to offer guidance on the treatment of the tax.e.The Respondent erred in law and in fact in its objection decision by holding that the changes made by the Tax Law (Amendment) Act No. 2 of 2020 to the Second Schedule of the Income Tax provided for retrospective computation of the commercial building allowance at 10% of the residual value of a commercial building in breach of the Appellant's legitimate expectation.

The Appellant’s Case 9. The Appellant gave out the details of its Appeal in its Statement of Facts dated and filed on 12th May 2023 and written submissions dated 20th September 2023 and filed on 21st September 2023.

10. The Appellant stated that its tax adviser wrote to the Respondent on 7th March 2022 requesting approval to include the Appellant’s ledger that had been omitted in its Capital Building Allowance (CBA) relating to capital expenditure incurred from 2015 to 2019.

11. That it received a response from the Respondent on 11th March 2022 notifying it that it needed to seek a private ruling to obtain guidance on whether it was possible to claim the omitted CBA in 2022.

12. That in adherence to the Respondent's direction, the Appellant wrote to the Policy Department of the Respondent on the 20th March 2022 seeking guidance on whether it was possible to amend its self-assessment returns submitted before 2016 under Section 90 of the Income Tax Act.

13. That it obtained a response from Respondent vide a letter dated 23rd June 2022 stating that the Commissioner could amend assessments for the years 2015 and 2016. That it was also its view that Section 90 of the ITA was not applicable considering that it had been repealed.

14. That under this guidance, the Appellant vide a letter dated 12th of July 2022 applied for an amendment to reflect the omitted CBA relating to capital expenditure of Kshs. 405,577,842. 00 that it had incurred from 2015 to 2019 but it was unable to effect the amendments.

15. The Appellant stated that it incurred capital expenditure on commercial buildings over the years 2015 to 2019 for which expenditure, commercial building allowance (CBA) was inadvertently omitted from its returns that were submitted for the said years. That in 2022, the Appellant through its tax adviser sought to amend its returns to include the omitted CBA.

16. That upon application for the said amendment, the Respondent conducted a verification exercise on its affairs and by a letter of findings dated the 13th of December 2022 gave a written approval of CBA at 25% on the Appellant’s qualifying expenditure incurred on commercial building of Kshs. 405,577,842. 00 spread out over the years 2015 to 2019. That the said letter of findings created a legitimate expectation of computation of the Appellant’s CBA on capital expenditure it incurred from 2015 to 2019 at 25% on a straight-line basis.

17. That pursuant to the aforesaid letter of findings the Appellant, through its tax adviser sought to lodge a claim for the capital allowance approved therein by way of an amendment of its returns for the period 2015 to 2019. The claim sought to affect the CBA on its capital expenditure incurred between 2015 and 2019 at the approved rate of 25% in 2022.

18. The Appellant stated that whereas the Second Schedule to the Income Tax Act (ITA) had been repealed providing for a 10% rate of investment allowance on qualifying capital expenditure down from the previous rate of 25%, this did not imply that the repeal of the law could be applied retrospectively to the computation of capital allowance on capital expenditure incurred before 2020.

19. That nevertheless, on 20th of January 2023, the Respondent sent a final communication to the Appellant notifying it that it had applied for a reduced investment allowance at the rate of 10% of the residual values.

20. That effectively this meant that although the capital expenditure incurred in 2017 had already been applied at a CBA rate of 25% in the years 2017 to 2019, the Respondent's interpretation meant that the residual balance of the capital expenditure would now be claimed over 10 years. That the balance of the capital expenditure incurred in 2018 and 2019 would also be treated similarly.

21. That consequently, the Respondent proceeded to grant Kshs. 257,281,87. 12 at the rate it had approved of 25%. The balance of Kshs. 148,296,354. 78 being the residual value of capital expenditure incurred in the period 2017 to 2019 falling due for claim in the year 2020 to 2022 was subjected to a reduced rate of investment allowance of 10%.

22. The Appellant opined that this position was not only unlawful but also breached its legitimate expectation from the guidance that had previously been issued by the Respondent's Policy Department.

23. The Appellant stated that being dissatisfied with the decision of the Respondent, it objected to the said assessment on the 1st of March 2023. That the objection was rejected by the Respondent on 28th April 2023.

24. That this action by the Respondent was unlawful as it contravened the provisions of Section 23(3) of the Interpretation and General Provisions Act (Cap 2) of the Laws of Kenya which provided that unless expressly stated therein, a new law cannot change the legal character of past transactions carried on lawfully upon faith in then existing laws.

25. The Appellant conceded that the change in Statutes had indeed repealed the Second Schedule to the Income Tax Act (ITA) replacing it with a new schedule providing for a 10% rate of investment allowance on qualifying capital expenditure down from the previous rate of 25%. That this change did not reduce its claim for investment allowance to the rate of 10% of the residual value.

26. That the Tax Law Amendment Act 2020 lacked transitional provisions to offer guidance on the treatment of tax written-down balances that had been carried forward from the previous years.

27. That adopting any other interpretation would amount to retrospective application of the law contrary to Section 23(3) of the Interpretation and General Provisions Act (Cap 2) of the laws of Kenya. It supported its argument with the case of Commissioner of Income Tax vs Pan African Paper Mills (E.A) Ltd 92018) eKLR.

28. The Appellant posited that the conduct of the Respondent in notifying the Appellant that it qualified for a Commercial building allowance (CBA) of Kshs. 405,577,842. 00 at a rate of 25% vide a letter dated 13th of December 2022 being its qualifying capital expenditure incurred in the years 2015 to 2019 created a legitimate expectation that its entire capital expenditure incurred in the years 2015 to 2019 would be subjected to CBA at 25% on a straight-line basis. It supported this view with the Court of Appeal case of Justice Kalpana H. Rawal vs Judicial Service Commission & 3 others (2016) eKLR.

29. That the fact that the letter was issued in the year 2022 meant that the Respondent had recognized that the CBA would apply despite the amendments of the law in 2020.

30. The Respondent stated that the Appellant should not be allowed to engage in incorrect interpretation of a clearly worded law and further detract from the prima facie rule of constitution in common law that statute should not be interpreted retrospectively to impair an existing right of the Appellant in the absence of clear language to that effect in the statute.

Appellant’s Prayer 31. The Appellant’s prayer to the Tribunal was for orders that:a.The Appeal be allowed in whole setting aside the decision of the Respondent providing for investment allowance at 10% of residual values and rejecting the claim for the said allowance at the rate of 25% of capital expenditure incurred by the Appellant in the years 2012 to 2019 as amended in 2022. b.The Respondent does allow for the claiming of investment allowance in the residual values of all commercial buildings of the Appellant that qualified for Commercial Building Allowance in the years 2017 to 2019 at 25% of its capital expenditure on a straight-line basis in all subsequent years as follows:i.Investment allowance of Kshs. 67,022,515. 00 to be claimed in 2020ii.Investment allowance of Kshs. 41,560,066. 22 to be claimed in 2021iii.Investment allowance of Kshs. 39,713,773. 22 to be claimed in 2022c.The cost of this Appeal be awarded to the Appellant

Respondent’s Case 32. The Respondent defended this Appeal while relying on its Statement of Facts dated and filed on 12th June 2023 and written submissions dated and filed on 19th October 2023.

33. The Respondent stated that the Appellant vide a letter dated 20th March 2022 sought guidance from the Respondent's Policy Unit on amendment of income tax returns for the tax period 2016-2019 to capture Commercial Building Allowances previously omitted.

34. The Respondent stated that contrary to the counsel from its Policy Unit, the Appellant did not file a claim for the Commercial Building Allowance (CBA) in the years 2015 to 2019 upon completion and use of the petrol stations.

35. That the claim for CBA under the repealed law was to be claimed in the year 2020.

36. That it was impossible to amend the 2015 self-assessment return because of the misalignment of the iTax system and the 5 years statutory threshold for amendment of returns.

37. The Respondent further stated that it was impossible to amend 2016-2019 self-assessment returns since a returns review exercise had been conducted and additional assessments were raised in the system. That it was also advised to introduce the values as additions in the year 2020.

38. The Respondent averred that the Appellant lodged its CBA claim in 2022 and yet wanted to apply the repealed rate of 25%. That the Appellant was notified of the changes in the law of CBA from 25% to 10% via several email correspondences.

39. The Respondent was of the view that any claim CBA made after the Tax Laws (Amendment) Act, 2020 was enacted would be considered under the new law which was now applicable.

40. The Respondent submitted that the Appellant having made the application for Commercial Building Allowance claim for the tax period years 2015 to 2019 vide letter dated 20th March 2022, then the Tax Laws (Amendment) Act, 2020 was the applicable law.

41. The Respondent further submitted that the burden of proof is upon the Appellant to prove that the tax assessment was wrong or excessive. That this burden of proof had not been discharged.

Respondent’s prayers 42. The Respondent prayed to the Tribunal for orders that:a.The Objection decision dated 28th April 2023 be upheld.b.Any other relief deemed just and fit be granted.

Issues for Determination 43. The issues that have presented themselves for determination from the evidence submitted by the parties before the Tribunal are:-a.Whether a tax claim can be filed or claimed from a repealed Statute.b.Whether the Respondent was justified to reject the Appellant’s amended assessment.

Analysis and Determination 44. The Tribunal having identified the issues falling for its determination proceeds to analyze the same as hereunder.

a. Whether a tax claim can be filed or claimed from a repealed Statute. 45. The parties in this dispute agreed that Paragraph 6A of the Second Schedule to the Income Tax Act was repealed vide Tax Laws (Amendment Act) No. 2 of 2020 wherein the rate for CBA claims was moved from 25% to 10%.

46. It was also not in dispute that these amendments took effect on the date of the assent of the Tax Laws (Amendment) Act, 2020 which was on 25th April 2020.

47. The point of disagreement between the parties is whether the Appellant could file a CBA claim in 2022 arising from expenses that were incurred between 2015 to 2019.

48. It is settled that all laws, including tax laws, are to be interpreted prospectively as was held in Kenya Bankers Association v Attorney General & another; National Assembly (Interested Party) [2020] eKLR, where the court stated as follows:“My interpretation of Article 116(2) as read with the pronouncements of the Supreme Court and the Court of Appeal is that legislation which is passed by Parliament should be applied prospectively unless it is expressly stated within the document that the legislation should apply retrospectively.

49. Section 23(3) of the Interpretation and General Provisions Act, CAP 2 of the Laws of Kenya, provides as follows regarding the effect of a repealed statute and whether any rights can be derived from such a repealed statute:“3)Where a written law repeals in whole or in part another written law, then, unless a contrary intention appears, the repeal shall not –(a)revive anything not in force or existing at the time at which the repeal takes effect; or(b)affect the previous operation of a written law so repealed or anything duly done or suffered under a written law so repealed; or(c)affect a right, privilege, obligation or liability acquired, accrued or incurred under a written law so repealed; or(d)affect a penalty, forfeiture or punishment incurred in respect of an an offence committed against a written law so repealed; or(e)affect an investigation, legal proceeding or remedy in respect of a right, privilege, obligation, liability, penalty, forfeiture or punishment as aforesaid, and any such investigation, legal proceeding or remedy may be instituted, continued or enforced, and any such penalty, forfeiture or punishment may be imposed as if the repealing written law had not been made.” (Emphasis added).

50. The foregoing case law and Section 23(3) of the Interpretation and General Provisions Act make it clear that the rights and benefits accrued from a repealed law are not extinguished and affected by a repeal. Instead, such rights and claims shall continue to exist as if the said law was not repealed.

51. Accordingly, the rights obtained by the Appellant to claim for CBA at the rate of 25% on a straight line under Paragraph 6A of the Second Schedule of the Income Tax Act (repealed) are still in existence.

52. The Appellant therefore has a right to file and make its claims thereof for as long as such claims are not affected by statute of limitations or any other written law.

53. The provision which amended the CBA claims from 25% to 10% under the Tax Laws (Amendment) Act, 2020 came into effect on the date of assent, which was on 25th April 2020.

54. The Tribunal thus finds and holds that the reduced CBA from 25% to 10% of the residual value would only apply prospectively from the 25th April 2020 and onwards. This reduced rate would not be applied to transactions and claims that accrued before 25th April 2020.

55. The upshot of this holding is that the Respondent erred in its decision to apply a capital allowance rate of 10% on PEL capital expenditure for the period 2017 to 2019 when the law entitled it to a capital allowance of 25% on a straight-line method under Paragraph 6A of the Second Schedule of the Income Tax Act (repealed).

b. Whether the Respondent was justified to reject the Appellant’s amended assessment. 56. Having held that the Appellant had a right to file CBA claims under the repealed Paragraph 6A of the Second Schedule of the income tax, the pending issue is to answer the question of the extent to which these claims may be made.

57. The Appellant attempted to benefit from the CBA claims by amending its assessments. Section 31(2) of the TPA states as follows regarding amendment of assessments:“A taxpayer who has made a self-assessment may apply to the Commissioner, within the period specified in subsection (4)(b)(i), to make an amendment to the taxpayer's self-assessment.”

58. The period for amending assessments is prescribed in Section 31(4) of the TPA as follows:“(4)The Commissioner may amend an assessment—(a)in the case of gross or willful 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 that 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:Provided that in the case of value added tax, the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.”

59. It is instructive to note that the TPA commenced on the 19th January 2016. It is thus only applicable to amended assessments which were filed from 19th January 2016 which was the date of commencement of the Tax Procedures Act.

60. The Respondent therefore had powers under Section 31(4) of the TPA to consider amendments regarding self-assessments which were filed within 5 years from the date when the request for amendments for the self-assessment was made by the Appellant.

61. In this regard, reference is made to Commissioner of Domestic Taxes v Airtel Networks Kenya Limited (Income Tax Appeal E062 of 2022) [2023] KEHC 25059 (KLR) (Commercial and Tax) (10 November 2023) (Judgment) where the High Court agreed with the decision of the Tribunal when it asserted that:“Under section 31(4) of the Tax Procedures Act, an amendment outside the 5 years can only be permitted if there is evidence of wilful neglect, evasion, or fraud by or on behalf of the taxpayer.”

62. The Appellant was hence at liberty to apply for amendment of its self-assessment that was filed after 19th January 2016, provided that this application was done within 5 years from the date when these assessments were filed.

63. The law applicable to the self-assessments that were filed before 19th January 2016 was provided in Section 90 of the Income Tax Act which stated that the Appellant could amend its self-assessment return within 7 years of submitting the return.

64. All assessments or returns that were filed before 19th January 2016 could thus be processed under Section 90 (repealed) of the ITA.

65. The outcome of this analysis is that the provisions of Section 90 of the Income Tax Act(repealed) would apply to all self-assessments filed before the 19th January 2016. On the other hand, the provisions of Section 31(4) of the TPA would apply to all self-assessments filed on or after 19th January 2016.

66. The Appellant was thus entitled to file for amendment of its assessments under Section 90 of the ITA(repealed) for the periods between 2015 and 18th January 2016 before the TPA was promulgated provided that such an application for amendment was made within 7 years from the date when the assessments or returns were filed.

67. In this case, the application for amendments for 2015 to 2018 was submitted on 12th July 2022. The earliest date when the 2015 returns could be filed was January 2016. This means that the earliest statutory time limit within which the Appellant would be required to file for an amendment of the 2015 assessment which was filed in 2016 was January 2023.

68. The application for amendment in this case was filed on 12th July 2022, which was within the statutory period prescribed in Section 90 (repealed) of the ITA.

69. The earliest date for filing the returns for 2019 was January 2020. Section 31(4)1) of the TPA allowed the Applicant 5 years within which to file its application for assessment. This means that the Appellant had up to January 2025 to file for amendment of its returns.

70. The fact that the application for amendment of the 2019 returns was filed on 12th July 2022 implies that it was filed within the statutory limit period.

71. It is also apparent that all the CBA claims from which an amendment has been sought were filed before the enactment of the Tax Laws (Amendment) Act, 2020. The new rate of 10% introduced under this new law is thus not applicable because the Appellant’s returns from which it now seeks an amendment were done under Paragraph 6A of the repealed Second Schedule of the ITA and it thus retained the right to apply for amendments of its returns under Section 90 of the ITA(repealed) within 7 years from the date when the returns were filed.

72. Applying the Appelant’s application for amendment of its returns for 2015 to 2019 under the Tax Laws (Amendment) Act, 2020 would amount to an illegal action of applying the Tax Laws (Amendment) Act, 2020, retrospectively.

73. Flowing from the foregoing analysis, it is apparent that the Appellant lodged its applications for amendment of its 2015 to 2019 assessments within the prescribed statutory limit period and that the law applicable to these assessments was Paragraph 6A of the repealed Second Schedule of the ITA.

74. The Appellant was thus entitled to an expectation that the Respondent would be considered its application for amendment of its assessments on merit and under Paragraph 6A of the repealed Second Schedule of the ITA.

Final Decision 75. Given the foregoing, the Tribunal finds that the Appeal is merited and accordingly makes the following Orders: -a.The Appeal be and is hereby allowed.b.The Appellant is entitled to Commercial Business Allowance at the rate of 25% of capital expenditure incurred in the years 205 to 20019. c.The Respondent is hereby directed to consider the Appellant’s application for amendment of its returns for the years 2015 to 2019 in line with order (b) above.d.The Respondent is to comply with directive (c) above of the Tribunal within 45 days from the date of this judgment.e.Each Party is to bear its own costs.

76. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MAY, 2024. ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERTIMOTHY B. VIKIRU - MEMBERABRAHAM K. KIPROTICH - MEMBER