[2025] KETAT 199 (KLR)

Pine Energy EA Limited v Commissioner of Domestic Taxes (Tax Appeal E177 of 2024) [2025] KETAT 199 (KLR) (14 March 2025) (Judgment)

Neutral citation: [2025] KETAT 199 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E177 of 2024

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, AK Kiprotich & G Ogaga, Members

March 14, 2025

Between

Pine Energy EA Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in the Republic of Kenya and its principal business is the importation and sale of gas in bulk.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. Under Section 5(1) of the Act, the Kenya Revenue Authority 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 functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts 1 and 2 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 issued the Appellant with a pre-assessment notice dated 5th October, 2021 for the periods 2017 to 2020 for Corporation taxes amounting to Kshs. 3,838,871,603. 00. The Appellant objected to the Respondent’s pre-assessment notice on 10th November, 2021.

4. The Respondent confirmed the assessment for the period 2017 to 2020 in respect of Corporation taxes amounting to Kshs. 3,548,324,782. 00 on 11th November, 2021.

5. The Appellant Objected to the said assessment vide its letter dated 15th November, 2021.

6. The Respondent issued its Objection decision vide its letter dated 31st March, 2022 reviewing the tax payable to Kshs. 679,910,075. 00.

7. The Appellant, being dissatisfied with the objection filed a Notice of Appeal that was dated and filed on 27th April, 2022.

The Appeal 8. The Appellant lodged its Memorandum of Appeal dated 7th February 2024 and filed on 13th February 2024 wherein it raised the following grounds:i.That the Respondent erred in law and fact by issuing its Objection decision dated 31st March, 2022 outside the statutory timelines as provided for under Section 51(11) of the Tax Procedures Act.ii.That the Respondent erred in law and fact by issuing a decision that violated the Appellant’s right to a fair hearing as enshrined in Section 4(3)(b) and 4(4)(b) of the Fair Administrative Action Act and Article 47 of the Constitution.iii.That the Respondent erred in law and fact in its decision to access the tax liability, initially based on banking and later on, assumed prices per kilogram based on a non-representative sample of the total sales over the period.iv.That the Respondent erred in law and fact by failing to use the best judgment in making its decision as provided under Section 29(1) and 31(1) of Tax Procedures Act No. 29 of 2015. v.That the Respondent erred in law and fact by using a wrong basis of computing the expected sales and the variances and thereby failed to ascertain the correct quantity of LPG imports by the taxpayer during the years in question by stating that the total quantity of import was 85,496,554. 00 kilograms whilst the correct figure was 55,606,360. 00 kilograms.vi.That the Respondent erred in law and in fact by disallowing expenses which were wholly and exclusively incurred in making the income in violation of Section 15 of Income Tax Act, Cap 470. vii.That the Respondent erred in law and fact by disregarding the supporting information and documents provided by the Appellant in making its decision.

Appellant’s Case 9. In support of the Appeal, the Appellant lodged its Statement of Facts dated 7th February 2024 and filed on 13th February 2024 together with documents attached thereto. It also relied on its Written Submissions dated 22nd October 2024 and filed on 25th October 2024.

10. The Appellant identified issues for discussion in this Appeal as discussed hereunder:-

Whether the Respondent was justified to demand the tax despite communicating the objection decision outside of the statutory time limit of sixty (60) days as per section 51(11) (b) of the Tax Procedures Act, 2015. 11. The Appellant stated that it lodged its objection on 15th November, 2021, and the Respondent’s decision was communicated on 31st March 2022, more than 135 days late. That this Appeal should thus be allowed in full as the Respondent lost the right to make a pronouncement of any kind once 60-days timelines expired.

12. It supported its point with the following cases:a.Eastleigh mall Limited v Commissioner of Investigations & Enforcement [2023] KEHC 2000 (KLR).b.TAT No. 21 of 2022-Cyka Manpower Services Limited -vs- Commissioner of Domestic Taxes.c.TAT Appeal No. 974 of 2022 inland Africa Logistics Limited vs Commissioner of Investigations and Enforcement.d.Ex-Parte M-kopa Kenya Limited and Vivo Energy Kenya Limited v Commissioner of Customs & Border Control.e.Kenya Revenue Authority & Another [2020] eKLR and the case of Republic v Commissioner of Domestic taxes Ex parte Fleur Investments Limited [2020] eKLR.

13. The Appellant urged the Tribunal to find that the Appellant’s objection dated 15th November 2021 was deemed to have been allowed by operation of the law on the 61st date after the Objection was lodged by the Appellant.

Whether the Respondent violated the Appellant’s right to a fair hearing as enshrined in section 4(3)(b) and 4(4)(b) of the fair Administrative Actions Act and Article 47 of The Constitution of Kenya. 14. The Appellant stated that the Respondent violated Article 47 of the Constitution by failing the test of fairness when it failed to consider its documents while issuing its assessment. It supported its argument with the case of Nizaba International trading Company Limited v Kenya Authority [2000] eKLR,

Whether the Respondent erred in law and fact in its decision to assess the tax liability, initially based on banking and later on, assumed prices per kilogram based on a non-representative sample of the total sales over the period. 15. The Appellant averred that the assessments were raised on it on 21st October, 2021 and that the Respondent erred in its decision to assess the tax liability, initially based on banking and later on, assumed prices per kilogram based on a non-representative sample of the total sales over the period.

16. It was its view that the prices assumed by the Respondent were average prices which did not meet a proper sampling distribution of the total sales made by it resulting in a conclusion that was incorrect, erroneous and misleading.

17. That the Respondent erred in the quantification of the LPG imports by the taxpayer during the years in question thereby understating the sales. That the whereas the Respondent stated that the total quantity of import was 85,496,554. 00 Kilograms, the correct figure was 55,606,360. 00 Kilograms because the Respondent’s basis of computing the expected sales and variances was inaccurate and based on wrong premise.

18. That the Respondent ignored the following workings which it had shared with it and which showed the correct quantity that it had imported:Taxpayer’s Table Working

Year Quantity

2017 / 2018 1,672,000

2019 27,797,54

2020 26,041,000

TOTAL 55,66,360

19. That the Respondent erred in law and fact in using a wrong basis of computing the expected sale and the variances and thereby arriving at an inaccurate and unsubstantiated figure.

Whether the Respondent erred in law and fact by failing to use judgment in making its decision as provided under Section 29(1) and 31(1) of Tax Procedures Act No. 29 of 2015 thereby applying a wrong basis of computing the expected sales and variances. 20. The Appellant stated that it had a sister company known as Gazlin Energy Limited that handled the product the Appellant imports at different levels of the value chain. That whereas the Appellant purchases the products from the supplier (s) and arrange for importation, Gazlin Energy Limited, on the other hand, handles logistics and the eventual delivery of the product up to the point of sale where they sell the products in wholesale.

21. That the invoices used by the Respondent to derive the expected sales did not follow the normal supply chain of the production and were thus inaccurate. That in the circumstances the Respondent ought to have used its best judgment as per Section 29(1) and 31(1) of Tax procedures Act No. 29 of 2015 when raising the assessment instead of relying on non-representative sample to arrive at exorbitant prices which was a way off the actuals.

Whether the Respondent erred in law and in fact by disallowing the expenses which were wholly and exclusively incurred in making the income in violation of section 15 of Income tax Act, cap 470. 22. That the Respondent is wrong in disallowing all expenses that the Appellant incurred in making the income. That the nature of its business just like any other business had expenses that had met the threshold.

23. The Appellant additionally submitted that:a.It provided the Respondent with supporting documents in support to its objection vide its Letter dated 28th November, 2022. that the supporting documents were but not limited to the Appellant’s invoices, audited accounts, import entries, bank statements, purchase ledgers, sales ledgers and reconciliation accounts for the period under assessment.b.These documents were relevant and sufficient to satisfy the Respondent as to the Appellant’s position that no revenue loss was occasioned to the Respondent given that the Appellant’s suppliers paid and accounted for the full VAT payable on the payments made by the Appellant at all times.c.It had provided all the necessary information to the Respondent during the Objection period.d.It further provided all its necessary financial information to the Tribunal during the course of the hearing of the instant matter which information has since been allowed as property on record before this Tribunal.

24. It was the view of the Appellant that having lodged a valid notice of objection, in accordance with Section 51(3) of the TPA, the Respondent was obliged to consider the same including the documents in support thereof.

25. That failing to consider the supporting documentation provided by the Appellant was a contravention of Section 51(8) of the TPA and the Appellant’s right to fair administrative action as provided for under Article 47 of the Constitution as was discussed in the case of Republic v Kenya Revenue Authority ex-parte Amsco Kenya Limited [2014] eKLR.

26. That alternatively, and without prejudice, the Appellant contended that the only order that the Tribunal should make if it fails to determine the foregoing issues in its favor is to issue an order reverting the decision back to the Respondent and compelling it to consider all the information provided and thereafter issue a proper tax assessment with the Appellant’s correct tax liability.

27. The Appellant posited that the Respondent erred in law by disallowing expenses which were wholly and exclusively incurred in making the income in violation of Section 15 of the Income Tax Act, cap 470.

28. That the circumstances surrounding the issuance of the tax assessment on which this Appeal is premised have raised questions and concerns of impropriety that may simply not be glossed over.

29. It submitted that the test of rationality to be applied in this case is two-fold. First, the decision-maker must act within the law and in a manner consistent with the Constitution, entreated not to misconstrue the nature of his or her power. Second, the decision must be rationally related to the purpose for which the power was conferred.

30. It was its view that unreasonableness, according to the work of De Smith, connotes decisions which have been accorded manifestly inappropriate weight; strictly “irrational” decisions, namely, decisions which are apparently illogical or arbitrary; uncertain decisions; decisions supported by inadequate or incomprehensible reasons; or by inadequate evidence or which are made on the basis of a material mistake or material disregard of fact.” That the casual and manual retrospective uplift of the tax’s tallies with this description.

31. The Appellant concluded by stating that the manner in which the tax demands were issued by the Respondent in this case was contrary to the provisions of the Constitution of Kenya, 2010, known tax legislations and more so the Rules of natural justice enshrined therein.

Appellant’s Prayers 32. The Appellant prayed for the following orders:i.The Appeal be allowed.ii.The Respondent’s decision as contained in the letter dated 31st March, 2022 be set aside in its entirety;iii.That the principal tax and attendant penalties and interest demanded by the Respondent amounting to Kshs. 679,910,095. 00 vide its decision as contained in its letter dated 31st March, 2022 be vacated forthwith in their entirety;iv.The costs of and incidental to this Appeal be awarded to the Appellant; andv.Any other orders that the Tribunal may deem fit.

The Respondent’s Case 33. In response to the Appeal, the Respondent lodged its Statement of Facts dated and filed on 31st May 2024. The Respondent also put in its Written Submissions dated and filed on 13th November 2024.

34. The Respondent stated that for the period under review 2017 to 2020, the Appellant supplied LPG to a related company called Gazlin Energy Limited.

35. That it issued tax assessments on 11th November 2021 based on available information covering years 2017 to 2020 with total tax liability Kshs. 3,548,324,787. 00 after the Appellant failed to provide explanations and reconciliations requested.

36. That the Appellant objected to the whole assessment through objection notice dated 15th November 2021 but it did not object to the quantity of LPG imported. That its main contention was on LPG price used by the Respondent in the assessment.

37. That it consequently issued an objection decision dated 31st March 2022 with total amended tax liability of Kshs. 679,910,075. 00.

38. The Respondent averred that it relied on copies of invoices provided by the Appellant during the objection review stage to compute expected average price.

39. It was its position that the Respondent did not provide the correct sales figures in its Appeal documents and hence its conclusion that the Appellant’s tax position is not incorrect and unreliable. That the Appellant did not also explain how the copies of invoices provided were an exception from normal supply chain as it had alleged.

40. The Respondent stated that the Appellant did not object the quantity of LPG that was used in the assessment and objection decision. That its attempts to introduce new information at the Appeal stage was not supported by detailed breakdown, import documents and the bundle of documents provided.

41. The Respondent stated that all costs and expenses incurred by the Appellant in each year under review were allowed in the tax computation as is provided under Section 15(1) of the Income Tax Act. That the Appellant has also not specified which allowable expenditure was not considered. That the expenses allowed included, purchases mainly imports, direct expenses, operating expenses, administrative, financial expenses and other expenses.

42. The Respondent identified the following two issues for determination in its Written Submissions:a.Whether or not the objection decision was time barred?b.Whether the Appeal Is Merited

Whether or not the objection decision was time barred? 43. The Respondents averred that, the Appellant in its submission avoided to quote the whole of Section 51[11] of the Tax Procedures Act 2015 prior to Finance Act 2022 amendments. It was its position that Section 51[11] of the TPA provided that:-“The commissioner shall make the objection decision within sixty days from the date of receipt of ---[a] the notice of objection; or [b] any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”

44. The Respondent averred that the Appellant deliberately quoted the law that was not applicable at the time of issuing objection decision so as to mislead the Tribunal.

45. It was its position that it engaged the Appellant through working meetings and email correspondence wherein the Appellant was appropriately advised that supporting documents for the objection were lacking. That the Appellant acknowledged this through an email sent on 6th January 2022, when it stated that;“It is regrettable that the requested information has taken longer than anticipated due to the bulkiness of the documents involved and the travel schedules of the Taxpayers’ Directors. Nonetheless, we hereby attach the following import documents for your perusal and consideration… Please note that we shall be sharing the sales and purchase ledgers in a separate email due to the limitation of space in a single email. We thank you for your continued support and commit to co-operate with the Commissioner until the matter is resolved amicably.”

46. That it further reminded the Appellant to provide supporting documents through an email dated 17th January 2022 in which the Respondent stated;“As reminded last week, we are unable to review your objection due to lack of supporting documents. Last week on 14th January 2022 you delivered hard copies of bank statements which were confirmed incomplete with various gaps noted. You did not provide all supporting documents as requested through our email dated 24th November 2021… it is expected that by COB today you will comply with the stipulations of section 51[3] of the Tax Procedures Act 2015 for the objection to be considered valid.”

47. That the last batch of supporting documents was sent by theAppellant through email on 23rd February 2022 whereupon it issued its Objection decision on 31st March 2022 which was 35 days after date of receipt of supporting documents which was issued within the timeline as stipulated under the then applicable Section 51[11] of the TPA.

Whether the Appeal is merited 48. The Respondent reiterated that even at the review stage, the Appellant failed to provide supporting documents requested that it had Respondent. That it was issued with email reminders on 9th and 29th March 2022 to provide sales ledgers and sales invoices to facilitate objection review.

49. The Respondent averred that the Appellant kept requesting for more time to provide supporting documents. And on 23rd March 2022 it allowed it more time to provide sales ledger and invoices in response to the Appellant’s email of 15th March 2022.

50. That the Appellant was still non-responsive even after being allowed more time to comply.

51. That the alleged supporting documents which were provided by the Appellant vide its letter dated 28th November 2022 could not be considered by the Respondent considering that they were sent several months after objection decision dated 31st March 2022 had been served.

52. The Respondent averred that, by apologizing for the delay and requesting for more time to provide supporting documents, the Appellant was well aware that the objection was not properly supported. That it is hence not true that all supporting documents were provided as stated by the Appellant in the submission.

53. That it thus relied on available information in amending the assessment in its Objection decision because the Appellant only provided invoices but failed to provide sales ledgers and complete bank statements as requested.

54. The Respondent averred that the assessment and the Objection decision was based on sales derived from quantity of LPG that was imported by the Appellant in the period under review and not on banking analysis. That the Objection decision was also on sales as supported by sample sales invoices provided by the Appellant.

55. The Respondent posited that the Appellant introduced VAT in its submission yet no VAT was assessed. That this and other irregularities noted in the submission clearly demonstrated lack of proper understanding of the issues under dispute on the part of the Appellant.

56. The Respondent averred that the Appellant fatally failed to support his objection and /or discharge its burden of proof, by availing documents in support of his objection and Appeal as is envisaged under Section 56(1) of the TPA and also in the case of PZ Cussons East Africa Limited VS. Kenya Revenue Authority [2013] eKLR.

Respondent’s Prayer 57. The Respondent prayed to the Tribunal for the following orders, that:i.The Appeal be dismissed with costs.ii.The Objection decision dated 31st March 2022 be upheld.

Issues For Determination 58. The Tribunal having considered the Memorandum of Appeal, the parties’ Statements of Facts, and written submissions, puts forth the following issues for determination:-i.Whether the Respondent’s Objection decision was validly issued pursuant to the provisions of Section 51(11) of the Tax Procedures Act, 2015. ii.Whether the Respondent’s additional assessments were validly raised pursuant to the provisions of Section 31 of the Tax Procedures Act, 2015.

Analysis And Findings Whether the Respondent’s Objection decision was validly issued pursuant to the Provisions of Section 51 of the tax Procedures Act, 2015. 59. Whereas the parties in this dispute are in agreement on the date when the Appellant lodged its objection and the date when the Objection decision was issued, the parties are no ad idem on the applicable law to this dispute and when time limitation under Section 51(11) of the TPA started running.

60. The record shows that:a.The Respondent issued its confirmed assessments for the period 2017 to 2020 on 11th November 2021b.The Appellant lodged its objection on 15th November 2021c.The Respondent issued its Objection decision on 31st March 2022.

61. The TPA version applicable to this dispute was the one in place as at 31st March 2021, which was the pre-June 2021 version. Section 51(11) thereof read as follows:“(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of—(a)the notice of objection; or(b)any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”

62. It is thus clear from this provision of the law that the 60 days time limit shall run from the date when the Commissioner received the notice of objection unless it can be shown that further documents which had been requested by the Commissioner were provided. In which case, time would reset and begin running afresh from the date when the said documents are received.

63. Put another way, receipt of new documents would reset the timelines prescribed under Section 51(11) of the TPA. However, in the event that that the documents that may have been requested by the Commissioner are supplied then the Commissioner would be beholden to issue its Objection decision within the prescribed timelines while relying on whatever documents that was in its possession.

64. The Respondent averred that time was reset in this Appeal when the Appellant acknowledged the sent additional documents vide an email that was sent on 6th January 2022 and also, when the Appellant provided further documents vide its email of 23rd February 2022. After which it issued its Objection decision on 31st March 2022 which was 35 days after date of receipt of supporting documents.

65. Whereas these averments, if true are capable of resetting time under Section 51(11) of the TPA. The Appellant in this case has denied the existence of these emails.

66. The Tribunal has noted that the Respondent did not attach these emails that were allegedly sent to it and attaching the supporting documents thereof. These emails were crucial in helping the Tribunal to sight the evidence which confirmed that the Appellant had submitted additional documents which had been requested of it.

67. It is baffling that the Respondent whose sole argument in its submission was that these emails had helped it kickstart time for compliance under Section 51(11) of the TPA could fail to attach this crucial evidence which it admitted to have been in its possession.

68. In a further bizarre twist, the Tribunal also notes that the Respondent had ironically admitted in its Statement of Facts that the Appellant never sent it any documents despite being issued with reminders to do so.

69. This contradiction is apparent in paragraph 11(3) of the Statement of Facts where the Respondent stated thus:“…the Respondent sent email correspondences to the Appellant with reminders to provide for sales ledgers and sales invoices to facilitate objection review. The Appellant was not responsive leaving the Respondent with no option but to rely on available information in amending the assessment.”

70. This contradiction is again depicted in paragraph 11(12) of the Statement of Facts where the Respondent stated thus:“At the objection review stage, the Appellant was requested and even allowed more time to provide supporting documents but chose not to cooperate.”

71. It was thus not possible for the same Appellant to have sent email of the documents requested when the Respondent had previously categorically stated that the documents were requested but were never supplied. This perhaps explain the reason why the Respondent was not able to supply the emails forwarding these documents to the Tribunal.

72. The Tribunal has also sighted the trove of email attached to the Appellant’s Statement of Facts from pages 19 to 22 and it has noted that all of them were emails for extension of time and also requesting the Appellant to provide it with documents. None of those emails was authored by the Appellant attaching or submitting additional documents that it been requested to supply as alleged by the Respondent.

73. Similarly, apart from begging for the documents, at no time did the Respondent invoke its powers under Section 51(4) of the TPA to expressly invalidate the Appellant’s objection.

74. Flowing from the above analysis, the facts of this case as they stand, point to a situation where the Appellant lodged its Objection 15th November 2021 and was requested to supply documents but it refused to heed to this request. Under the circumstances, and in the absence of additional documents supplied, the law under Section 51(11) of the TPA required the Respondent to issue its Objection decision on 14th January 2022. the same was issued on 31st March 2022. It was thus late by about 75 days and hence its invalidity.

75. This conclusion of the Tribunal is supported by the case of Rongai Tiles & Sanitary Wares Limitedv Commissioner of Domestic Taxes (Tax Appeal E011 of 2020) [2023] KEHC 18546 (KLR) (Commercial and Tax) (16 June 2023) (Judgment) where the court stated thus on the consequence of failure to abide by the timelines prescribed under Section 51(11) of the TPA.“The Commissioner’s delay in delivering the Objection Decision within sixty days of receiving the objection meant that the objection was allowed by operation of law. Failure to render the Objection Decision in time was fatal and the Commissioner could not demand any taxes therein.”

76. Having determined that the Objection decision was not proper in law for being issued beyond the statutory timelines, the Tribunal shall not delve into the other issue for determination as the same has been rendered moot.

Final Decision 77. The upshot of the foregoing analysis is that the Appeal is found to be meritous and the Tribunal accordingly proceeds to make the following Orders;a.The Appeal be and is hereby allowed.b.The Respondent’s Objection decision dated 31st March 2022 be and is hereby set aside.c.Each party to bear its own costs.

78. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 14THDAY OF MARCH, 2025ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERGLORIA A. OGAGA - MEMBER