[2023] KETAT 525 (KLR)

Pitbull Agencies Ltd v Commissioner of Domestic Taxes (Tax Appeal 538 of 2022) [2023] KETAT 525 (KLR) (19 October 2023) (Judgment)

Neutral citation: [2023] KETAT 525 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 538 of 2022

RM Mutuma, Chair, EN Njeru, M Makau, BK Terer & W Ongeti, Members

October 19, 2023

Between

Pitbull Agencies Ltd

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act of the laws of Kenya and is in the business of civil engineering consultancy.

2. The Respondent is a principal officer appointed under the Kenya Authority Act and mandated with the responsibility of assessing, collecting, receipting and accounting for all tax revenue as an agent of the Government of the Republic of Kenya, The Respondent is also vested with the mandate of the administration and enforcement of all statutes set out in the schedule to the said Act.

3. The dispute in this Appeal arose from the additional VAT assessments issued on the Appellant based on noted variances between turnover as per the filed income tax returns and the filed VAT returns for the years 2016 and 2017.

4. The dispute on VAT for the periods March 2017 and January 2018 arose from additional assessments issued on the Appellant on the basis that it had failed to declare sales relating to transactions with Nyandarua County Government for the assessed period under the provisions of the VAT Act.

5. The Appellant was issued with a total VAT assessment for the sum of Kshs. 2,924,801. 00 for the four different periods, and filed notices of objection for the respective periods on 17th December 2017, 19th October 2021 and 24th November 2021, respectively.

6. The Respondent issued objection invalidation notices for VAT for December 2016, December 2017, March 2018 and January 2018 on 14th February 2022, 17th January 2022 and 15th December.

7. Dissatisfied with the Respondent‟s objection decision the Appellant filed the Appeal herein with the Tribunal.

The Appeal 8. The Appellant filed its Memorandum of Appeal on 26th May 2022 and set out the following grounds of Appeal;i.That the aforesaid (output) VAT additional assessments were based on purchases without taking into account credit for input tax against output tax is invalid in tax law as being contrary to the requirements of Section 17 of the VAT Act.ii.That the Respondent should not have raised additional assessment without taking into account the referred provision of the law hence against the Fair Administrative Actions Act, and article 47 of the Constitution of Kenya.iii.That the Respondent while raising additional assessments made a substantial error or defect in the procedure provided by the VAT Act, Section 17 and the rules made thereunder which may possibly have produced error in the decision.iv.That the Respondent erred in law in his interpretation and application of Section 17 (2) of the VAT Act thereby disallowing the input tax for the months of December 2016, March 2017, January 2018 and December 2017. v.That the Respondent erred in failing to allow the expenses that the Appellant legally incurred in the production of income in the respective months.vi.That the Respondent erred in fact by failing to consider the purchases invoices presented to it a professionalism deficiency on his part unlike as put in his vision.vii.That the Respondent claim that the purchases were not supported was in disbelief to the Appellant as all documents requested by the Respondent were availed hence Section 30 of the Tax Tribunal Act read with Section 62 of the VAT Act.viii.That the output (additional assessment) based on information from IFMIS data withholding VAT were grossed up then assessed totally ignoring Section 17 of VAT Act hence the Respondent „s decision was contrary to law or some usage having the force of law.ix.That the Respondent by purporting/alleging that the additional assessment were based on the variance established between turnover as per filed income tax returns and VAT returns and also ignoring Section 17, credit for input tax against output tax , Section 60- burden of proof as per VAT Act, and Section 30 TAT Act, has made a substantial error or defect in the procedure provided by the VAT Act and TAT Act and the rules made thereunder which may possibly have produced error or defect in the decisions of the case upon its merits.x.That the Commissioner‟s decision is contrary to law or some usage having the force of law, and the decision failed to determine some material issues of law or usage having the force of law. or a substantial error or defect in the procedures provided by the tax laws and rules made thereunder which may possibly have produced error or defect in the decision of the case upon merit, is punitive, erroneous, excessive and against Articles 47 and 50 of the Constitution of Kenya, together with Section 62 of the VAT Act.

The Appellant‟s Case 9. The Appellant has set out its case on its Statement of Facts filed on 26th May 2022 and the written submissions filed on 8th August 2023.

10. The Appellant stated that the Respondent carried out a compliance review on the iTax ledger and other records for the purpose of obtaining the full information in respect of the income of a person or class of persons, chargeable to tax, hence estimated additional assessment of Kshs. 2,924,801. 00 including penalty and interest, which were issued on 15th December 2021, 13th November 2021, 28th September 2021, and 18th March 2021 that were received on the same date.

11. The Appellant stated that it objected to the estimated output VAT additional assessment on the 19th April 2022.

12. The Appellant further stated that it submitted all the documents and complied with the Respondent‟s requirements within the time limits and prove that;a.The additional assessments were excessive;b.The decision should not have been made or should have been made differently.

13. The Appellant also stated that it fulfilled the provisions of Section 30 of the TAT Act, as read with Section 62 of the VAT Act.

14. The Appellant stated that the Respondent by dishonoring or not taking into account credit for input tax against output tax is a decision contrary to law or to some usage having a force of law.

15. The Appellant further stated that the decision having failed to determine some material issues of law or usage having the force of law ignored or did not take into account “fair hearing, fair administrative action and access to information“ all provided for by the Constitution of Kenya.

Appellant‟s Prayer 16. The Appellant by reason of the foregoing submissions prayed that the Respondent‟s assessments and the objection decision be set aside and the Appeal be allowed.

The Respondent‟s Case 17. The Respondent has set out its case on the Statement of Facts dated 24th June 2022 and filed on 29th June 2022 as well as the written submissions dated and filed 22nd December 2022.

18. The Respondent stated that the assessments on the Appellant were issued as follows;i.December 2016 – VAT principal tax of Kshs. 311,196. 30 and shortfall penalty of Kshs. 62,239. 26. ii.December 2017- VAT principal tax of Kshs. 342,510. 08. iii.March 2017 – Principal tax of Kshs. 224,357. 92 and shortfall penalty of Kshs. 44,871. 58. iv.January 2018 – Principal tax of Kshs. 857,861. 92 and shortfall penalty of Kshs. 171,572. 38.

19. The Respondent also stated that the Appellant‟s notices of objection from December 2016, March 2017, and January 2018 were lodged on time, while the objection for the December 2017 was lodged late.

20. The Respondent stated that the Appellant objected to its assessments on the basis that;a.VAT assessments for January 2018 and December 2017;i.Additional assessment is excessive by some error or mistake of fact of the taxed income.ii.Assessment did not take into account credit for input tax against output tax.iii.By disallowing purchases maliciously failed to employ cardinal principle of matching costs with revenue. They could not make any revenue without incurring cost i.e. purchases.iv.The Respondent should not have recognized the revenue when he disallowed purchases since one cannot have sales without incurring costs.b.VAT assessments for December 2016 and March 2017;i.The basis of the additional assessments was not provided.ii.The Appellant did not trade nor receive any income during the months.

21. The Respondent further stated that the Appellant stated the grounds of objection in its objection application letter but did not provide any evidence in support of the same to enable the Respondent review the case.

22. The Respondent averred that it wrote to the Appellant with regard to its objection applications for December 2016, March 2017, and January 2018 vide emails dated 29th December 2021, 30th November 2021 with several reminders informing the Appellant of the basis of the additional assessments and reminding the Appellant of what constitutes a valid objection under the provisions of Section 51 (3) of the TPA and requesting the Appellant to submit all the relevant documents in support of their objection grounds for review failure to which the application would be rejected.

23. The Respondent also averred that it also wrote to the Appellant with regard to its late objection application for December 2017 vide emails dated 30th November 2021, a reminder on 7th December 2021 informing the Appellant of what constitutes a valid objection under the provisions of Section 51 of the TPA and requested and requesting the Appellant to clarify and support its late objection reason and submit all the relevant documents failure to which the objection would be rejected.

24. The Respondent stated that the Appellant was non-responsive to the Respondent‟s requests and did not avail any of the required documentation to enable the Respondent review the matter.

25. Consequently, the Respondent issued the invalidation notices for VAT for the period December 2016, December 2017, March 2018, and January 2018 on 14th February 2022, 15th December 2021, 17th January 2022 and 15th December 2021.

26. The Respondent submitted that whereas the Appellant has averred that it erred in law by issuing additional assessments based on purchases without considering credit for input taxes against output taxes contrary to Section 17 of the VAT Act, the Appellant filed its VAT self-assessment returns for the periods December 2016, March 2017, January 2018, and December 2017 and failed to claim any inputs in the returns by not declaring any purchases in their returns for the period.

27. The Respondent further submitted that it issued additional assessments for the periods December 2016, March 2017, January 2018, and December 2017 and filed on 15th December 2021, 18th March 2021 ,13th November 2021 and 28th September 2021 respectively by introducing sales (output tax) on noted undeclared sales for the period and did not alter the purchases (input tax) claimed in the Appellant‟s self-assessment return.

28. The Respondent further submitted that the input tax claims for the assessed periods would have been time barred as per the provisions of Section 17 (2) of the VAT Act by the time the additional assessments were issued and therefore could not have been incorporated in the additional assessment, noting that the Appellant did not also provide details of the same.

29. The Respondent also averred that contrary to the Appellant‟s assertions, there was no input claimed by the Appellant in its VAT self-assessment returns for the months of December 2016, March 2017, January 2018 and December 2017 for the Respondent to disallow.

30. It was also an averment of the Respondent that it did not fail to allow the expenses legally incurred in the production of income as contended by the Appellant, and avers that the Appellant filed its VAT self-assessment returns for the periods December 2016, March 2017, January 2018 and December 2017 and failed to claim any inputs in the returns by not declaring any purchases for the period in the returns. The Appellant did not also provide any details of the same.

31. The Respondent also contended that the input tax claims for the assessed periods would have been time barred by the time of issuing the additional assessment as per the provisions of Section 17 (2) of the VAT Act, and therefore could not have been incorporated in the additional assessments.

32. It was also a submission of the Respondent that the Appellant is required to keep proper records as required by Section 23 (1) (b) of the TPA which provides as follows:-“(1)A person shall –(b)Maintain any document required under a tax law so as to enable the person‟s tax liability to readily ascertained.”

33. The Respondent also submitted that Section 51 (3) (c) of the TPA expressly provides for the Appellant to provide all documents in support of its objection to enable the Respondent make an informed decision.

34. The Respondent also relied on Section 56 (1) of the TPA which places the burden of proving an assessment to be incorrect squarely on the Appellant‟s shoulders.

Respondent‟s Prayers 35. By reason of the foregoing, the Respondent prayed that its objection decision be upheld and the Appellant„s Appeal be dismissed with costs.

Issues For Determination 36. The Tribunal having carefully considered the pleadings filed and the submissions made by the parties is of the considered view that the Appeal distils into two issues for determination as hereunder;i.Whether the Respondent „s Objection invalidation decisions dated 15th December 2021, 17th January 2022, 14th February 2022, were validly issued.ii.Whether the Respondent‟s assessments against the Appellant were justified.

Analysis And Determination 37. The Tribunal proceeds to analyze and determine the issues as hereunder;i.Whether the Respondent „s Objection Invalidation decisions dated 15th December 2021, 17th January 2022, 14th February 2022 were validly issued.

38. The dispute herein relates to additional VAT assessments issued by the Respondent against the Appellant based on noted variances between turnover as per the filed income tax returns and the filed VAT returns for the period in issue.

39. From the facts submitted by the parties, the assessments were issued as follows;i.December 2016 – VAT principal tax of Kshs. 311,196. 30 and shortfall penalty of Kshs. 62,239. 26. ii.December 2017 – VAT Principal tax of Kshs. 342,510. 08. iii.March 2017 – Principal tax of Kshs. 224,357. 92 and a shortfall penalty of Kshs. 44,871. 58. iv.January 2018- Principal tax of Kshs. 857,861. 92 and a shortfall penalty of Kshs. 171,572. 38.

40. The Respondent submitted that the Appellant‟s notices of objection for December 2016, March 2017, and January 2018 were lodged by the Appellant on time, while the objection for December 2017 was lodged late.

41. The Respondent also submitted that the Appellant stated the grounds of objection in its objection application but failed to provide any evidence in support of the grounds to facilitate the Respondent‟s review of the objection.

42. It is noteworthy that vide its emails dated 30th November 2021 and 29th December 2021, with several other reminders , the Respondent informed the Appellant the basis of its assessments in regard to its objection applications for December 2016, March 2017, and January 2018, and also reminded the Appellant on what constitutes a valid objection under the provisions of Section 51 (3) of the TPA, and further requested the Appellant to submit the relevant documents in support of its grounds of objection for review failing which the objection would be rejected.

43. Similarly, the Respondent wrote to the Appellant, and similarly requested for documents in support of the objection on 30th November 2021 with a reminder on 7th December 2021 with regard to its late objection application for the December 2017 period, requesting for supporting documentation and reasons for the lateness.

44. The Respondent has averred that the Appellant was non-responsive to its letters and subsequent reminders and did not avail the requested documentation to the Respondent as requested.

45. As a consequence, the Respondent averred that it was compelled to issue the invalidation notices for VAT for the period December 2016, December 2017, March 2018 and January 2018, on the 14th February 2022, 15th December 2021, 17th January 2022 and 15th December 2021.

46. The Tribunal has carefully reviewed the pleadings filed and documents submitted by the Appellant and is satisfied that it did not provide supporting documentation sought by the Respondent to support its objections nor provide reasons for its late objection application.

47. The provisions of Section 51 (3) of the TPA are clear as regards the validity of a notice of objection:-“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if –a)The notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;b)…..c)All relevant documents relating to the objection have been submitted.”

48. It is the uncontroverted evidence of the Respondent that the Appellant did not support its objection application inspite of repeated requests to do so. In this regard therefore, the Appellant‟s three notices of objection though lodged on time did not satisfy the criteria set out by Section 51 (3) (c) of the TPA and were therefore not valid.

49. With regard to the notice of objection for the December 2017 which was lodged late, there is again uncontroverted evidence by the Respondent that the Appellant failed to provide reasons for the late filing and supporting documentation to facilitate substantive review of the objection. Again, this objection failed for unexplained lateness and was therefore invalid in line with the provisions of Section 51 (7) of the TPA.

50. In light of the foregoing, the Tribunal finds and holds that the Respondent‟s objection invalidation notices dated 15th December 2021, 17th January 2022, 14th February 2022 and 15th December 2021 were validly issued.

51. The Tribunal having made a finding that the Appellant‟s objection notices were invalid renders the second issue moot and therefore the Tribunal would not consider the same.

Final Decision 52. The upshot of the foregoing is that the Appeal fails and the Tribunal accordingly proceeds to make the following Orders:-a.The Appeal be and is hereby dismissed.b.The Respondent „s Objection Invalidation decisions dated 15th December 2021, 17th January 2022, 14th February 2022 and 15th December 2021 be and are hereby upheld.c.Each party to bear its own costs.

53. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 19th DAY OF October, 2023ROBERT M. MUTUMA - CHAIRPERSONELISHA N. NJERU - MEMBERMUTISO MAKAU - MEMBERBONIFACE K. TERER - MEMBERDR. WALTER ONGETI - MEMBER