[2024] KETAT 578 (KLR)

Powerchina Guizhou Engineering Loiyangalani-Suswa Project Co Limited v Commissioner of Legal Services & Board Coordination (Tribunal Appeal 1387 of 2022) [2024] KETAT 578 (KLR) (22 March 2024) (Judgment)

Neutral citation: [2024] KETAT 578 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal 1387 of 2022

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

March 22, 2024

Between

Powerchina Guizhou Engineering Loiyangalani-Suswa Project Co Limited

Appellant

and

Commissioner of Legal Services & Board Coordination

Respondent

Judgment

1. That the Appellant is a company incorporated in Kenya under the Companies Act whose principal activity is the provision of construction services.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. 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 revenue. Further, 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 1 & 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. On April 7, 2022, the Respondent issued additional assessments on the Appellant in relation to income tax for the year 2019 through its itax platform.

4. The Appellant filed its objections to the assessments through the itax platform on 23rd June 2022.

5. On 19th July 2022, the Respondent declined to grant the application for an extension of time to lodge an objection thereby confirming the entire assessment of Kshs. 150,429,191. 00

6. The Appellant, being dissatisfied with the Respondent’s decision dated 19th July 2022, lodged the instant Appeal at the Tribunal on the 16th November 2022.

The Appeal 7. The Appeal is premised on the Memorandum of Appeal dated 16th November 2022 and filed on even date raising the following grounds: -i.The Respondent erred in law and fact by disregarding the actual turnover realized and reported by the Appellant and arbitrarily increased the Appellant's turnover for the period under review and thereafter assessed additional income taxes, penalties and interest.ii.The Respondent erred in law and fact by disregarding all the documentation provided including the financial statements and tax returns, and proceeded to confirm the additional income tax assessments.iii.The Respondent erred in law and fact by assessing additional tax on income which had already been taxed and payments of the tax made by the Appellant.iv.The Respondent erred in law and fact by assessing additional taxes on cash received from debtors during the period under review, while the income had been declared and taxed in the years preceding the year of assessment and taxes duly paid.v.The Respondent erred in law and in fact by disallowing expenses incurred by the Appellant in the production of the taxable income during the period under review, thereby assessing additional taxes on account of the disallowed expenses.

The Appellant's Case 8. The Appellant’s case is premised on its: -a.Statement of Facts dated 16th November 2022 and filed on the same date.b.Written submissions dated 23rd August 2023 and filed on 6th September 2023.

9. The Appellant averred that during the period under review, it had only one client, Kenya Electricity Transmission Company Limited (KETRACO) and had been awarded only one project in Kenya, the construction of the Loiyangalani-Suswa 400KV transmission line.

10. That the project had been awarded to a consortium involving the Appellant and the Nari Group Corporation.

11. The Appellant averred that during the period under review, there was no ongoing project and hence it declared nil returns in its financial statements.

12. The Appellant averred that in the preceding years it had carried out the construction of the Loiyangalani-Suswa 400KV transmission line where it had billed a total of Kshs. 11,000,454,159. 00 which was fully declared and taxes paid in 2018.

13. The Appellant averred further that the said contract price had not been paid in full, despite the Appellant having billed KETRACO for the full contract price.

14. The Appellant reiterated that all the income from the project was declared in 2018 in accordance with the accrual concept of accounting and taxation which requires that income should be declared and taxes paid in the year it is accrued and not when it is paid.

15. That in declaring its income in 2018 it was guided by the International Accounting Standard (IAS) 18 which deals with the recognition and measurement of revenue.

16. The Appellant averred that some of the withholding certificates for the payments made in 2018 were issued in 2019 by KETRACO.

17. The Appellant averred that despite availing all the information, the Respondent disregarded all the facts in the documents presented by the Appellant in the financial statements, tax returns and source documents, and proceeded to erroneously make the additional assessment on the proceeds paid in 2019, while they had already been declared in 2018. That the Respondent also assessed proceeds from the withholding tax certificates related to income which had already been declared and taxed in 2018.

18. The Appellant averred that it lodged its objection on 23rd June 2022 on the itax platform and explained the late objection was occasioned by the Appellant's absence from Kenya. That the Appellant via email correspondences explained and provided documents in support of its late objection via the emails dated 29th June 2022 and 15th July 2022 acknowledged by the Respondent in its invalidation notice dated 19th July 2022.

19. That the Section 51(6) of the Tax Procedures Act stipulates that:“the Commissioner may allow an application for the extension of time to file a notice of objection if-a.the taxpayer was prevented from lodging the notice of objection within the period specified in subsection (2) because of an absence from Kenya, sickness or other reasonable cause; andb.the taxpayer did not unreasonably delay in lodging the notice of objection.”

20. The Appellant stated that its director was not in the Country when the assessments were issued and that it used the most reasonable time to file its objection once informed and aware of the assessments.

21. That it is prejudicial to the Appellant to disallow its objection, yet the Appellant provided a satisfactory reason to explain the delay incurred in filing the late objection due to its absence from the Country and that even so, the Respondent cannot claim the delay was unreasonable.

22. The Appellant relied on the case of Mwangi S. Kimenyi vs. Attorney General and Another, {2004) eKLR, where the court stated: -“When the delay is prolonged and inexcusable, such that it would cause grave injustice to the one side or the other or to both, the court may in its discretion dismiss the action straight away. However, it should be understood that prolonged delay alone should not prevent the court from doing justice to all the parties - the plaintiff, the defendant and any other third or interested party in the suit; lest justice should be placed too far away from the parties.Invariably, what should matter to the court is to serve substantive justice through a judicious exercise of discretion which is to be guided by the following issues;1. whether the delay has been intentional and contumelious;2. whether the delay or the conduct of the Plaintiff amounts to an abuse of the court;3. whether the delay is inordinate and inexcusable;4. whether the delay is one that gives rise to a substantial risk to a fair trial in that it is not possible to have a fair trial of issues in action or causes or likely to cause serious prejudice to the Defendant; and5. what prejudice will the dismissal cause to the Plaintiff? By this test, the court is not assisting the indolent, but rather it is serving the interest of justice, substantive justice on behalf of all the parties."

23. The Appellant submitted that using the test by the learned Judge above, the delayed objection was not intentional, the conduct of the Appellant does not amount to an abuse of the court process, that the delay was not inordinate and inexcusable, that the delay does not give rise to a substantial risk to fair trial of issues in action or likely to cause serious prejudice to the Respondent but dismissal of this Appeal on grounds of the notice of invalidation issued by the Respondent will be greatly prejudicial to the Appellant and will not be serving the interest of justice.

24. That the Appellant would be condemned unheard, if the Tribunal does not determine this case based on merits as the tax liability claimed is excessive, and erroneous and the Appellant risks being subjected to double taxation if the tax claimed is recovered by the Respondent.

25. The Appellant further relied on Suluhisho Africa Limited v Commissioner of Domestic Taxes (Miscellaneous Application E007 of 2023) [2023) KETAT 242 (KLR) (Commercial and Tax) (31 March 2023) (Ruling) where this Tribunal ruled on a similar issue about an invalidation notice issued by the Respondent. The Tribunal held: -“In the current Application, the Applicant reiterated that it was unable to lodge the Objection within time due to its director's sickness at the time of lodging the Objection.As such, the Tribunal finds that there is an arguable Appeal and the same has triable issues that can only be gleaned at an evidentiary hearing before it."

26. That in the above case, the Tribunal further observed that" the Applicant's recourse to justice lies in an appeal to the Tribunal. Thus, the Applicant would suffer prejudice if it is not granted leave to file its appeal considering that the amount of money claimed is of significant value. It is the view of the Tribunal that the Respondent would otherwise still collect the taxes together with penalties and interest should the Applicant be found to be at fault."

27. The Appellant averred that this Tribunal was the Appellant’s recourse to justice and that it would suffer prejudice if this case is not decided on its merits considering the amount claimed is of significant value and the Respondent would otherwise still collect taxes together with penalties and interest should the Appellant be found to be at fault.

28. The Appellant averred that the Respondent without any basis or justification adjusted its turnover upwards for the period under review and thereafter erroneously assessed additional taxes on the difference between the adjusted turnover and what the Appellant had declared.

28. The Appellant reiterated that in accordance with Sections 108 and 109 of the Evidence Act it had discharged its burden of proof on the erroneous assessment of income on the Appellant.

30. That Section 108 read together with Section 109 of the Evidence Act provides that:“(108)The burden of proof in a suit or proceeding lies on that person who would fail if no evidence at all were given on either side."

And that; "(109)The burden of proof as to any particular fact lies on the person who wishes the court to believe in its existence unless it is provided by any law that the proof of that fact shall lie on any particular person"

31. The Appellant averred that in adherence to Section 43 of the VAT Act, it ensured to keep all records in the course of its business and produced the requisite documents during the audit carried out by the Respondent in compliance with Section 23 of the Tax Procedures Act on keeping of records.

32. The Appellant averred that it provided the documents requested by the Respondent but the Respondent failed to reconcile the accounts and still demanded the erroneous tax and claimed that the Appellant failed to produce adequate documents to validate its objection.

33. To buttress its averments, the Appellant relied on Republic v Commissioner of Domestic Taxes Large Tax Payer's Office Ex Parte Barclays Bank of Kenya ltd [2012] eKLR where the court held the proposition that the decision to tax must have a legal basis and that Section 56(1) does not empower the Appellant to make speculative assessments (citing Johnson v Scott (Inspector of Taxes) nor was it the intention of the legislature to put the taxpayer in a position where he would be required to produce any documents that the taxman requires.{Citing Peter Bonde Nielson v Commissioner of Domestic Tax [2016} ekLR.

34. The Appellant posited that it concurred with the court in Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR which held in its analysis of the appeal from the Tribunal that:“the TAT was persuaded by the Respondent's evidence. It was persuaded that the Respondent discharged the burden of proof but more importantly, in auditing a taxpayer the Commissioner is required to properly consider the documentation provided and to understand the information. It is not sufficient for the Commissioner to merely request information and then disregard it and issue an assessment as it sees fit. Where the Commissioner issues an assessment based on the taxpayer's accounts and records but has misconstrued those records then it will be sufficient for the taxpayer to explain the nature of the Commissioner's misconception, point out the flaws in the analysis and to explain how those records and accounts should be properly understood."

35. That in this regard, the Respondent misconstrued the Appellant's documents and did not provide any justifiable basis as to why it disregarded the Appellant's documentation and explanation in its attempt to reconcile the various variances alleged.

36. The Appellant implored the Tribunal to acknowledge and act on the glaring errors made by the Respondent who not only disregarded the Appellant's supporting documentation but made an excessive assessment and that the tax decision should have been made differently.

37. The Appellant cited the case of Keroche Industries Limited V Kenya Revenue Authority & 5 Others [2007] Eklr where the court held:“It is no good answer for the taxman to proclaim that Kshs 1 billion (appx) is intended to swell the public treasury because due to the application of the above principles that money is not lawfully due... Applying the same reasoning, to the matter before this court, it does not matter that the respondents say and think they are owed over a billion Kenya shillings - what matters is whether the amount is lawfully due and whether the law allows its recovery? It is not a question of impression or perception of what is owed, instead, it is what if anything, is owed under the relevant law and whether its assessment and recovery is permitted by the applicable law. If rightly due, the huge amount notwithstanding the court must uphold the right of recovery regardless of its consequence to the applicant and if not due under the law it must not hesitate to disallow it and must disallow it to among other things to uphold both the law the integrity of the rule of law."

38. The Appellant relied on the Keroche Case in beseeching the Tribunal to disallow the Respondent from recovering the unfair, unlawful, excessive and unjust tax assessments from the Appellant.

39. The Appellant stated that the monies it received in the subsequent years after the project were debt owed to it and that the Respondent erred in treating the debt paid as income, yet the amounts had been considered when the Appellant remitted the taxes due in the year of income 2018 despite not being fully paid by its client.

40. That the Respondent failed to take into consideration the provisions of Section 54 of the Income Tax Act by failing to consider the documents produced by the Appellant in the year of income 2018.

41. The Appellant contended that the Respondent without any basis or justification adjusted its turnover upwards for the period under review and thereafter erroneously assessed additional taxes on the differences between the adjusted turnover and what the Appellant had declared.

42. It was the Appellant's submission that contrary to the Respondent's assertions, it duly filed its returns and paid all income tax as evidenced by copies of its tax returns and financial statements attached.

43. The Appellant averred that the Respondent disregarded proper financial statements prepared by the Appellant and went ahead to use speculative figures which appear to have been plucked from thin air to make the assessments herein.

44. The Appellant submitted that it incurred expenses in performing the contract for KETRACO including but not limited to salaries and wages.

45. The Appellant submitted that the Respondent failed to acknowledge the expenses incurred in the running of the Appellant's business contrary to the provisions of the Income Tax Act Section 15 which provides that all expenses incurred in the generation of income are tax allowable.

46. The Appellant placed reliance on the following cases:a.Silver Chain Ltd -vs- Commissioner Income Tax & 3 Others [2016} eKLRb.Hancock v General Reversionary and Investment Company {1919} KB 5,c.Nizaba International Trading Company Limited v Kenya Revenue Authority {2000} eKLR

47. The Appellant proffered that contrary to the Respondent's allegation, it discharged its burden of proof by providing the various financial statements of the period under audit and the expenses incurred all in an attempt to aid in the reconciliation of the accounts. That it produced unchallenged and uncontradicted evidence to prove its case. That the burden of proof ought to shift to the Respondent to prove its allegations.

48. The Appellant further relied on the cases of:-i.Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya {2021] eKLRii.Supreme Court of Canada in Johnston v Minister of National Revenue 1181ii.George v Federal Commissioner of Taxation,_{1952} HCAii.Kilburn v Bedford (H.M. Inspector of Taxes) 1955 Chancery Division, 36, p.262.

49. The Appellant averred that it was clear that the Respondent who is aptly equipped and mandated to collect and assess taxes was committing an illegality by imposing unfair, excessive and unjust taxes to a committed and diligent taxpayer who has been at the forefront in submitting tax returns.

Appellant’s Prayers 50. The Appellant prayed that this Tribunal finds:i.Allows this Appeal;ii.Sets aside the Respondents' decision of 19th July 2022 confirming the assessments.iii.Awards costs of this Appeal to the Appellant.

Respondent's Case 51. The Respondent’s case is premised on the hereunder documents filed with the Tribunal: -a.Respondent’s Statement of Facts dated and filed on 16th December 2022,b.Respondent’s written Submission’s dated 2nd August 2023 and filed on 4th August 2023.

52. The Respondent asserted that the Appellant had under-declared its sales in the year of income 2019 as it filed nil returns. That as a result, the Respondent adjusted the sales and charged additional income tax on the banking receipts of the Appellant in that year which related to the collection of debts on income earned and declared in the previous years of income.

53. The Respondent submitted that it communicated via its audit notice dated 27th January 2022, of its intention to conduct an audit, wherein the Appellant was requested to avail records, books of account and any other document that would support its tax returns.

54. That the Appellant failed to adduce sufficient or the required evidence to support its returns, which consequently led to the assessments.

55. That based on the above, it issued the Appellant with an assessment dated 7th April 2022 to which the Appellant made a late objection on 23rd June 2022.

56. The Respondent submitted that it issued a letter on 19th July 2022 confirming the assessment as the Appellant had not provided the requisite documentation to support its late objection application.

57. The Respondent submitted that in the financial year 2019, it was established that the Appellant did not declare exempt sales on VAT3 returns but claimed input VAT on purchases made contrary to the provisions of the VAT Act, 2013.

58. That it was established that in the year 2019, the Appellant paid professional fees amounting to Kshs.280,323,936. 00. That data on tax withheld taxes revealed that the Appellant withheld tax amounting to Kshs.1,181,599. 00 from gross payments amounting to Kshs.36,129,211. 00. That therefore, the Appellant did not account for withholding tax on professional fees for that year.

59. The Respondent submitted that it was established that the Appellant did not register or account for PAYE despite claiming employment expenses amounting to Kshs.13,979,748. 00 in the year 2019.

60. The Respondent contended that the burden rests on the Appellant to prove that the assessments issued were either arbitrary or erroneous.

61. That the Respondent contended that it did not disregard any actual turnover or documents that the Appellant may have availed. That to the contrary the Appellant did not adduce the requested documents and its explanations of the contents in the availed documents did not support the figures therein.

62. The Respondent submitted that the additional assessments issued on the income were because the Appellant earned income amounting to Kshs.501,430,637. 00 in the year 2019. That this was not declared and only expenses amounting to Kshs. 49,315,237. 00 were declared. It was also established that the Appellant did not file IT2C for the year 2020.

63. The Respondent averred that although the Appellant contended that the income received from debtors was assessed and paid up in the preceding year, the same wasn’t supported in the audit. That the Appellant, under the Tax Procedures Act is required to keep proper records of documents in support of its returns.

64. The Respondent contended that it did not err in disallowing the expenses that the Appellant alleges it incurred in the production of taxable income. That to the contrary, the Respondent reiterated that the allegation was unfounded because it could not be sufficiently supported.

65. That the Respondent is allowed by Section 24(2) of the Tax Procedures Act, 2015 to assess a taxpayer's liability using any information available to him.

66. The Respondent submitted that the Appellant's objection was made late and although it filed for extension of time it failed to meet the threshold stipulated under Section 51(3) of the Tax Procedures Act, 2015. That specifically, the Appellant did not adduce evidence and/or documents in support of the objection.

67. It was the Respondent's further submission that it did not err in law or fact as it carefully examined the information available to it before issuing the assessment.

Respondent’s Prayer The Respondent prayed that the Tribunal finds: -i.The Appeal be dismissed with costs.ii.The confirmed assessment vide the decision dated 19th July 2022 be upheld.

Issues For Determination 68. The Tribunal having carefully considered the parties' pleadings, documentation and the written submissions filed, notes that the issues that call for its determination are as follows: -a.Whether the notice of objection was validb.Whether the additional tax assessments were justified

Analysis And Determination a. Whether the Appellant’s Notice of Objection was Validly Lodged 69. The Appellant upon being served with the additional income tax assessment on the 7th April 2022 for a sum of Kshs.150,429,191. 10 proceeded to lodge its objection on the 23rd of June 2022.

70. Section 51 of the Tax Procedures Act provides that any taxpayer dissatisfied with any tax decision ought to object to the tax decision and the notice of objection has to be lodged with the Commissioner within thirty (30) days of being served with the decision. The relevant parts of the Section read as follows:-“A taxpayer who wishes to dispute a tax decision shall first lodge an objection against that tax decision under this section before proceeding under any other written law.A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the Commissioner within thirty days of being notified of the decision.”

71. It is manifestly clear that the Appellant having been notified of the additional tax assessment on the 7th of April 2022 was enjoined in law to lodge its notice of objection to the assessment within 30 days. The Appellant fell short of timeously lodging the notice of objection as it lodged its objection on the 23rd of June 2022 which was more than 76 days after receipt of the assessment.

72. With the Appellant having defaulted in timeously lodging its notice of objection, it was available for the Appellant to sanitize the late notice of objection by invoking the provisions of Section 51 (6) of the Tax Procedures Act which permits for enlargement of time upon an application to the Commissioner in writing.

73. The Commissioner upon receipt of the late notice of objection proceeded to notify the Appellant vide an e-mail on 29th June 2022 to provide reasons and evidence to support its request for an extension of time to lodge a late objection.

74. The Appellant failed to provide evidence to support the allegation that its director was out of the country at the time when the assessments were issued.

75. The Appellant despite the reprieve received from the Respondent allowing it to provide the reasons and evidence in support of the delay in lodging its objection, maintained its reliance on mere averments without providing evidence to inform the commissioner's consideration of the request for extension of time.

76. The Respondent upon the Appellant's default in providing the reasons for the late notice of objection proceeded to issue a decision rejecting the application for extension of time on the 23rd September 2022. It was only upon receipt of the final decision on invalidation of the objection that the Appellant vide a letter dated 25th September 2021 attempted to explain the cause for the delay in lodging the notice of objection.

77. The Appellant having failed to provide sufficient reasons for lodging the notice of objection outside the statutory timeline the Commissioner could not exercise his discretion to enlarge time for lodging the notice of objection under Section 51 (7) of the Tax Procedures Act. The Section states as follows: -“The Commissioner may allow an application for the extension of time to file a notice of objection if--the taxpayer was prevented from lodging the notice of objection within the period specified in subsection (2) because of an absence from Kenya, sickness or other reasonable cause: andthe taxpayer did not unreasonably delay in lodging the notice of objection…”

78. The Respondent is only enjoined in law to consider and issue an objection decision in respect of a valid objection lodged in time. This is provided for under Section 51 (8) of the Tax Procedures Act which reads as follows: -“Where a notice of objection has been validly lodged within time the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, and Commissioner's decision shall be referred to as an "objection decision"

79. The Tribunal reiterates its decision in the case of W.E.C. Lines Ltd vs. Commissioner of Domestic Taxes [TAT Case No. 247 of 2020] where it held 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”.

80. The Tribunal is further guided by the case of Equity Group Holdings Limited vs. Commissioner of Domestic Taxes [2021] eKLR, relating to strict dictates of compliance with any statute, Mativo J. observed that: -“A statutory edict is not a procedural technicality. It's a law which must be complied with. Parliament in its wisdom expressly and in mandatory terms provided…"

81. The Tribunal therefore finds that the Respondent’s decision to reject the Appellant’s application to file a late objection was justified.

82. The Tribunal having determined that the notice of objection was invalid did not delve into the issue that remained for its determination as it had been rendered moot.

Final Decision 83. On the basis of the foregoing analysis the Tribunal finds that the Appeal lacks merit and accordingly proceeds to make the following Orders: -i.The Appeal be and is hereby dismissed.ii.The Respondent's decision of 19th July 2022 be and is hereby upheld.iii.Each Party is to bear its own Costs.

84. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF MARCH, 2024. ERIC NYONGESA WAFULA CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH- MEMBERABRAHAM K. KIPROTICH- MEMBERTIMOTHY B. VIKIRU- MEMBER