[2023] KETAT 168 (KLR)

Price Waterhouse Coopers Limited v Commissioner for Legal Services & Board Coordination (Appeal 576 of 2021) [2023] KETAT 168 (KLR) (Commercial and Tax) (10 February 2023) (Judgment)

Neutral citation: [2023] KETAT 168 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Appeal 576 of 2021

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, AK Kiprotich & Jephthah Njagi, Members

February 10, 2023

Between

Price Waterhouse Coopers Limited

Appellant

and

Commissioner for Legal Services & Board Coordination

Respondent

Judgment

1. The Appellant is a limited liability company established and incorporated in Kenya under the Companies Act. Its principal business activity is the provision of professional services including audit and assurance, advisory and tax services.

2. The Respondent is a principal officer appointed pursuant to Section 13 of the Kenya Revenue Authority Act, (Cap. 469 of the Laws of Kenya) and Kenya Revenue Authority is empowered to enforce and administer provisions of written laws set out in Section 5 as read together with the First Schedule to the Act.

3. The Appellant computes the taxable income in any given year of income and files a tax return in accordance with the ITA.

4. The Respondent issued a notice advising all taxpayers, including the Appellant that effective 1st August, 2015 all income tax returns had to be filed using the Respondent’s iTax platform.

5. Pursuant to the notice, the Appellant filed a return for the year of income ending 31st December, 2015 on iTax. As per the tax computation and tax return for the year of income 2015, the Appellant was in a return taxable position of Ksh. 242,223,952. 00. The Appellant had a tax overpayment (excess credits) amounting to Ksh. 72,774,764. 00.

6. The iTax return upload file did not have a separate field for the Appellant to declare valid excess tax credits that were paid off the iTax system. These included:-a.Tax overpayments brought forward from prior years;b.Instalment taxes not paid through iTax with a Payment Reference Number (PRN);c.Manual withholding tax certificates; andd.Advance tax receipts.

7. Consequently, when filing the Corporate income tax (“CIT”) return for the 2015 year of income, the Appellant accounted for the manual withholding tax certificates on iTax by including the credits amount under the option provided under Section 42 special credits of the iTax return.

8. On 23rd August, 2019, the Respondent wrote to the Appellant, with regards to a review of tax credits and asked the Appellant to supply information. Notable was the request for evidence of payment to support credits claimed under Section 42 in the income tax return filed for 2015 year of income.

9. The Appellant replied to the Respondent through a letter dated 30th January 2021.

10. In its response the Appellant stated that the credits claimed under Section 42 related to manual withholding tax certificates for 2015 year of income, which the Appellant had in possession when filing the 2015 return. Further the Appellant noted it was undergoing an audit and the same had been shared with the audit team for verification. The analysis of the withholding tax credits claimed in the 2015 return is as follows:Description Amount (KES) Reference

2015 tax liability 72,667,185 2015 SAR

Less: installment taxes paid 2015 SAR

2015 withholding tax credits on iTax (35,555,461) 2015 SAR

2015 withholding tax credits (manual) (37,219,303) 2015 SAR

Tax overpayment carried forward to 2016 (107,579) 2015 SAR

11. The Appellant utilized the manual withholding tax credits against Corporate income taxes in the year of income 2015. As a result, in the year of income 2015, the tax overpayment was Kshs. 105,578. 00 and carried forward to the year of income 2016.

12. To date the Respondent has not replied to the Appellant’s letter dated 30th January 2021.

13. The above notwithstanding, on 29th June 2021, the Respondent assessed the Appellant for additional Corporate income tax of Kshs. 62,993,693. 00 for the year of income ended 31st December 2015 vide a Corporate income tax assessment.

14. The Appellant in exercise of its right under Section 51(2) of the Tax Procedures Act (“TPA”) objected to the assessment in its entirety in a letter dated 29th July 2021.

15. The Appellant objected to the assessment on the basis that the Kenya Revenue Authority (“KRA”) erred in disregarding the tax credits in the year of income, yet the credits were fully supported by evidence of payment.

16. The Respondent rendered its objection decision in a letter dated 10th August 2021. In the letter the Respondent confirmed the decision to disallow the tax credits claimed on the income tax company self-assessment under Section 42 credits and confirmed additional assessment amounting to Kshs. 14,739,288. 00 being a total of the amounts claimed under Section 42 credits in the 2015 year of income.

17. Dissatisfied with the Respondent’s decision, the Appellant lodged its Appeal at the Tribunal vide a Notice of Appeal dated 9th September 2021.

The Appeal 18. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated 22nd September, 2021 and filed on the same date:-a.That the Respondent erred in law and fact by disallowing CIT credits amounting to Kshs. 36,457,934. 00 claimed by the Appellant in 2015 year of income as the tax credits were valid and fully supported.b.That the Respondent erred in law and fact by disallowing the Appellant’s utilisation of tax overpayments from prior periods which utilisation was in line with legitimate expectation created by the Respondent’s systems and practice over time.c.That the Respondent erred in law and fact in demanding interest amounting to Kshs. 26,535,760. 00 as the interest arises from an erroneous assessment.d.That the Respondent’s assessment violates the Appellant’s Constitutional right to fair administrative action, as it does not disclose the reasons for the decision and change of practice.

Appellant’s Case 19. The Appellant’s case is premised on the Statement of Facts dated and filed on 22nd September 2021 and the Written Submissions dated 30th May, 2022 and filed on 31st May, 2022.

20. In support of the ground that The Respondent erred in law and fact by disallowing CIT credits amounting to Kshs. 36,457,934 claimed by the Appellant in 2015 year of income as the tax credits were valid and fully supported, the Appellant avers as follows.

21. That the Kenya Revenue Authority erred by disallowing CIT credits claimed by the Appellant and demanding interest on tax credits which were fully supported.

22. That in filing the CIT returns for the year 2015 on iTax, the Kenya Revenue Authority had not fully configured the system to enable utilization of the company’s tax credits. Additionally, the Kenya Revenue Authority did not allocate a Payment Registration Number (“PRN”) for the Appellant’s tax credits at the time of transitioning from the legacy System to iTax, which meant that the iTax system could not reflect the tax credits brought forward from the previous years.

23. That in order to prevent the loss of the tax credits brought forward, the Appellant claimed the credits under Section 42 of the ITA. This was based on the fact that it was the only alternative available for disclosure of tax overpayments brought forward from previous years on Kenya Revenue Authority’s iTax CIT return template.

24. That the withholding tax credits were included under special credits since it was the only available spot in iTax for disclosure of additional credits in the upload file as the amounts had not been reflected as advance payments in iTax at the point of submitting the return

25. That although the company claimed the overpaid taxes as special credits, these are legitimate and there was no tax lost by the Respondent as the Appellant had paid all the requisite taxes that were due and payable for the year of income 2015

26. That the Respondent cannot hide behind technicalities to frustrate the taxpayer’s claims contrary to Article 159 of the Constitution of Kenya, 2010. In this regard, the Appellant relies on Raila Odinga and 5 Others versus IEBC & 3 Others [2013] eKLR wherein the Supreme Court of Kenya stated as follows:“The essence of Article 159 of the Constitution is that a court of law should not allow the prescriptions of procedure and form to trump the primary object of dispensing substantive justice to the parties depending on the appreciation of the relevant circumstances and the requirements of a particular case.”

27. That it then follows that the erroneous assessment as well as the resultant interests should be vacated in their entirety.

28. In support of the ground that the Respondent erred in law and fact by disallowing the Appellant’s utilisation of tax overpayments from prior periods which utilisation was in line with legitimate expectation created by the Respondent’s systems and practice over time, the Appellant avers as follows:

29. That the Respondent wrote to the Appellant vide a letter dated 30th January 2021 in respect of income tax credits declared under Section 42 of the ITA for the year 2015. In this letter, the Respondent requested for information supporting the credits claimed by the Appellant under Section 42 (credits under special arrangements) for the year of income ended 31st December 2015.

30. That the Appellant responded vide a letter dated 30th January 2021 stating that the credits claimed under Section 42 related to manual withholding tax certificates for the year of income 2015.

31. That it is of essence that the reasoning behind claiming the foregoing credits under Section 42of the ITA is taken into consideration.

32. That in practice Kenya Revenue Authority, through iTax, automatically allowed taxpayers to utilize overpaid income taxes against future income tax liability. This is due to the fact that once a taxpayer files a tax return showing a tax over payment, the Kenya Revenue Authority validated the overpaid taxes and transferred the amount to the advance payment account in iTax with a PRN allocated to it.

33. That the said practice is in consonance with the provisions of Section I1 of the Income Tax Act which has a provision that allows the taxpayer to utilize the advance payments from prior periods as tax credits to offset against the income tax liability for the year when filing tax returns. The said return is a document developed by Kenya Revenue Authority for use by taxpayers.

34. That in addition to the practice explained above, the Kenya Revenue Authority allows transfers of tax overpayments from one year to another to be utilized to offset taxes as they arose.

35. That, in the Appellant’s view, this practice by Kenya Revenue Authority on utilization of tax credits created a legitimate expectation that the company could carry forward their income tax overpayments for use against future income tax liabilities. The concept of legitimate expectation is well buttressed in the Supreme Court decision in Communication Authority of Kenya & 5 Others vs Royal Media Services Limited & 5 Others [2014] eKLR where it is stated that the doctrine of legitimate expectation as applied by the Courts stipulates that:“a legitimate expectation may arise – either from an express promise given on behalf of a public authority- or from the existence of a regular practice which the claimant can reasonably expect to continue.”

36. That had the Kenya Revenue Authority allocated a PRN for the tax overpayments in line with its tax practice the company would have been able to utilize the tax credits in line with the law.

37. That, it is then clear, that the erroneous tax assessments should be vacated in their entirety.

38. In support of the ground that The Respondent erred in law and fact in demanding interest amounting to Kshs. 26,535,760. 00 as the interest arises from an erroneous assessment, the Appellant avers as follows:

39. That, without prejudice to the Appellant’s earlier grounds, the company avers that the Kenya Revenue Authority’s imposition of interest for the year 2015 is erroneous as it is based on incorrect tax assessments and that this is informed by the fact that the incremental tax payable as assessed by Kenya Revenue Authority is not due and payable.

40. That the late payment interest as provided under Section 38 of the TPA only applies in instances where tax is not paid by the due date.

41. That the Appellant paid all applicable taxes by the respective deadlines and there is no late payment that would trigger late payment interest as imputed by the Kenya Revenue Authority. The imposition of late payment interest is therefore unmerited and lacks basis in law.

42. That the Appellant reiterates that once the Kenya Revenue Authority concludes the verification and migration of the tax credits to the iTax platform, the position will remain that there is no outstanding tax liability. Consequently, the late payment interest will not apply.

43. That accordingly, the assessment for additional interest of Kshs. 26,535,760. 00 on the principal liability amounting to Kshs. 36,457,934. 00 lacks legal merit and should be vacated in its entirety.

44. In support of the ground that the Respondent’s assessment violates the Appellant’s Constitutional right to fair administrative action, as it does not disclose the reasons for the decision and change in the established practice, the Appellant avers as follows:

45. That the assessment does not provide the basis or reasons for the assessment.Whilst acknowledging the manual withholding tax certificates, the Respondent alleges that it cannot ascertain payments for the certificates hence the rejection of the credits arising from the manual certificates.

46. That the manual certificates have not resulted in any loss of Government revenue and hence the failure to provide reasons on which the assessment is based and rejecting the withholding tax credits without any substantial basis violates the Appellant’s Constitutional right to fair administrative action.

47. In support of the ground that The Respondent’s assessment violates the Appellant’s Constitutional right to fair administrative action, the Appellant avers as follows:

48. That the assessment order does not provide the basis or reasons for the assessment yet the Respondent acknowledges the manual withholding tax certificates but alleges that the payments for the same cannot be ascertained and hence the rejection of the credits arising from these manual certificates.

49. That the manual certificates have not resulted in any loss to Government revenue and hence the failure by the Respondent to provide reasons on which the assessment is based and rejecting the credits without any substantial basis violates the Appellant’s rights contrary to Article 47(1) of the Constitution.

50. That the Court in Republic v Commissioner of Domestic Taxes Large Taxpayers’ Office ex-parte Barclays Bank of Kenya Limited (2012) eKLR stated that:“…Section 35(1) of the ITAidentifies specific types of payments that attract tax, the Respondent is obligated by law to state with clarity its claim and state how the transaction falls within the terms of the statute. The Respondent cannot excise its duty like a trawler in the deep sea expecting all the fish by casting its net wide…”

51. That such rejection of valid and duly supported withholding tax credits is unfair, arbitrary and unconstitutional.

52. That in the objection decision the Respondent has referred to a sum of Kshs. 14,739,288. 00 as being the disallowed withholding tax credits. That further the Appellant notes that this is contradictory to the sum of Kshs. 36,457,934. 00 which is the principal amount contained in the assessment order. This contradiction by the Respondent makes it a challenge for the Appellant to conclusively respond to the Appeal with no clarification nor basis of the correct assessed amount.

53. That in this regard, the Appellant submits that the Respondent erred in law and fact by rejecting otherwise valid and duly supported claims and prays that the erroneous assessment of Kshs. 36,457,934. 00 should be vacated in its entirety.

54. That prior to coming into force of the TPA, and in line with the provisions of Section 47 thereto, there was in place Section 105 of the ITA which provided as follows:(1)If it is proved to the satisfaction of the Commissioner that, in respect of a year of income, tax has been paid by or on behalf of a person, whether directly or by deduction or otherwise, which is in excess of the amount payable by that person as finally determined in respect of that year of income, the Commissioner shall refund the amount of the excess, together with any interest which may be payable thereon under this Act, to the person entitled to the refund.2. When tax is due and payable by a person in respect of an assessment, any amount refundable to that person under this section shall be applied towards the satisfaction of the tax so due and payable to the extent of that tax and the amount so applied shall not be refunded.3. A claim for repayment under this section shall be made within seven years after the expiry of the year of income to which the claim relates; but in a case to which section 79(1)(c) applies, a claim for repayment may be made within the period in which an assessment may be made.”

55. That even with the coming into force of the TPA on 19th January 2016, Section 105 of the ITA remained in force until it was repealed by the Finance Act 2016. Hence 2015 returns filed prior to the coming into effect of the Finance Act 2016 were filed while Section 105 of the ITA was still in place.

56. That the administration of tax overpayments under Section 105 of the ITA was by claiming tax credits on the iTax ledger. Overpayments claimed as credits on iTax allowed the same to be appropriated towards settlement of any assessment or refunded to a taxpayer by crediting the taxpayer’s “Advance Payment Account” on the iTax ledger and the amount could then be applied to future tax obligations. When filing self-assessment returns, the Appellant as well as other taxpayers would claim overpayments made in the previous years by introducing them as a tax credit in the ledger of the return for the current year by reducing their tax liability by the amount overpaid in the previous tax period. The only way the system would allow the introduction of such a tax credit was through introducing the credit under “Line 13. 4” of the ledger as a credit under Section 42 of the ITA.

57. That the above now repealed under Section 105 of the ITA is unlike the requirement under Section 47 of the TPA which requires a taxpayer to make an application for refund of any overpayments in the “approved form”. The application is subjected to an audit process and the Respondent is expected to communicate its decision on the application within ninety (90) days of the date of receipt thereof.

58. That even with these requirements of Section 47 of the TPA, the Respondent:a.Did not provide the approved form by configuring its system accordingly; andb.Continued to administer tax overpayments as credits claimed on the iTax ledger under line 13. 1 - 13. 8 and appropriated to a taxpayer’s “Advance Payment Account” or utilised towards settlement of a taxpayer’s tax liability.1. That in accordance with taxation principles of effectiveness and fairness, it was incumbent upon the Respondent to, in compliance with the letter of the law, make appropriate provision in its tax administration system to be consistent with the change in law. Additionally, the Respondent ought to have legally notified taxpayers of any such changes, including notifying taxpayers that they will no longer claim their tax overpayments as tax credits on the system.2. That having failed to do so, the Respondent allowed the Appellant and other taxpayers to continue claiming tax credits on the iTax system under line 13. 4 as Section 42 special credits. The Respondent has since the coming into effect of Section 47 of the TPA never raised any issue or rejected tax overpayments claimed as tax credits under the line 13. 4 of the iTax ledger until recently.3. That by not raising as issue on tax returns filed by the Appellant and other taxpayers over the years, the Respondent created a legitimate expectation to the Appellant that the tax overpayments so claimed on iTax as tax credits were duly claimed as overpayments.4. That the Appellant relies on Krish Commodities Limited v Kenya Revenue Authority [2018] eKLR where the Court of Appeal held as follows:“Moreover, it is common ground that the identification of the applicable rate of duty payable was done by the Simba System. The Appellant had no role in declaring or setting the rate to be applied. For the Respondent to turn around and pass the to the Appellant by contending that it was aware at all material times of the right rate cannot hold any weight. More so, taking into account that the Respondent’s own officers verified the entries made and even inspected the consignments. The Respondent’s officers were not acting as a conveyor belt performing a perfunctory exercise. The reason they were there was to verify the accuracy of the entries and the duty payable before clearance of the consignments in question. Having verified the entries in issue, rate applied and assessed duty as correct, a legitimate expectation arose in favour of the Appellant that the assessed duty was correct.”

63. That similarly for the present case, the Respondent having allowed the Appellant to continue claiming its overpayments tax credits when filing its self- assessment returns on its iTax system, and having continued to appropriate such overpayment either to the Appellant’s “Advance Payment Account” on iTax or utilise the said tax credits towards offsetting additional assessments on the system, the Respondent had indeed created a legitimate expectation and cannot now turn around and pass the buck to the Appellant.

64. That the Respondent used technicalities to subvert justice as explained below.

65. That it is not contested by the Respondent that the overpayments/ credits were duly arising as tax overpayments the Respondent only contests that the overpayments were wrongly claimed on iTax. Therefore, it is clear that the validity of the overpayments is not in question.

66. That it is clear to both parties that what the Appellant claimed were tax overpayments and not ITA Section 42 special credits. Further, the Appellant avers that this situation is neither new nor prejudicial to the Respondent as the Respondent, with full knowledge of the inadequacies of the iTax system, had allowed the Appellant and other taxpayers to claim their overpayments in the manner described.

67. That the Respondent has suddenly, in an unjust and unfair manner, turned on the Appellant and other taxpayers, rejecting all of their tax overpayments by the mere fact that they were introduced into iTax as Section 42 special credits claims and thereafter issued additional assessments for the years the overpayments were claimed.

68. That the disallowance of tax overpayments on the grounds that they were claimed on iTax as Section 42 Special credits is an attempt by the Respondent to rely on a technicality to subvert justice.

69. That this can only be a new tactic through which the Respondent hopes to unfairly generate taxes into its tax basket albeit momentarily before the Appellant and other taxpayers make refund applications under Section 47 of the TPA. This can only be described as a tax administrator acting irrationally, unfairly and unjustly by hiding behind the letter of the law to subvert justice while failing to properly administer the said letter of the law.

70. That in the earlier cited case of Krish Commodities Limited v Kenya Revenue Authority, the Court of Appeal while addressing similar circumstances where the Commissioner of Customs and Border Control sought to rely on the letter of the law to circumvent its obligation to fair administrative processes, the Court stated as follows:“27. To us, the fact that the Respondent was empowered to carry out a post clearance audit and demand short-levied duty did not excuse the Respondent from exercising such power in a reasonable, fair, efficient and effective manner. As b a public authority, the Respondent’s obligation to act in the afore mentioned manner while rendering decisions is delineated under Article 47 of the Constitution which states, inter alia, that:“Every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair.”28. Did the Respondent act fairly and reasonably. We think not. There was no explanation as to why the post clearance audit and the subsequent demand for the alleged short-levied duty was made about 4 years after the initial assessment and payment of the duty so assessed. Even, Mr. Nyaga was at a loss of words with which could explain as to why it took such a long time. It is not in dispute that Section 135(3) of the EACCMA allows the Respondent to make such a demand within 5 years. However, that is not to say that the Respondent should wait until the tail end of the said period before making such a demand. There ought to be sufficient reason(s) as to why such audit and demand is made at the tail end. In our minds, the Respondent cannot simply stand behind the time limit given to justify its conduct of demanding the short-levied duty in question about 4 years later.”

71. That the Appellant relies on the Supreme Court decision in Raila Odinga and 5 Others v IEBC & 3 Others [2013] eKLR where the Court stated that:“The essence of Article 159 of the Constitutionis that, a court of law should not allow the prescriptions of procedure and form to trump the primary object of dispensing substantive justice to the parties depending on the appreciation of the relevant circumstances and the requirements of a particular case.”

72. That in Lemaken Arata v Harum Lempaka & 2 Others eKLR, it was stated that, “the exercise of the jurisdiction under Article 159 of the Constitution is unfettered especially where procedural technicalities pose an impediment to the administration of justice.”

73. That the Appellant provided the Respondent with all relevant documentation to support the overpayments that it had claimed. However, the Respondent opted to disregard the overpayments only because they were declared on a field in iTax that was “not proper”. That this notwithstanding the fact remains that there was no other field provided by the Respondent within the iTax system where the said overpayments could be “properly” disclosed for the same to be utilised as tax credits.

74. That there was no revenue loss to the Respondent.

75. That the Appellant is a professional services firm focused on providing audit, assurance, advisory and tax services and in the course of carrying out its business, it provides some services to its clients for which payments are subject to withholding tax.

76. That the manual WHT certificates arose as a result of its clients deducting tax on payments due to the Appellant which are eligible for WHT and remitting the same directly to the Respondent. That in this regard, the Respondent is of the knowledge that several taxpayers deducted and remitted taxes to the Respondent and provided manual WHT certificates to the Appellant. It was not the Appellant’s responsibility to bar the withholders from using this method to confirm the deduction of tax.

77. That these amounts remitted to the Respondent are taken as a credit against the Appellant’s corporate income tax for which the Appellant rightfully claimed.

78. That while confirming the assessment order, the Respondent stated as follows:“The Domestic Taxes assessed you for the year of income 2015 by disallowing the tax credits claimed on the Income Tax Company self- assessment return under credits provided for under Section 42 of the Income Tax Act Cap 470. ”

79. That notably the assessment of Kshs. 62,993,693. 00 for the year 2015 comprised the credit disallowed of Kshs. 26,457,936. 00 plus penalties and interest. The Respondent therefore issued the assessments as a matter of course upon disallowing the Appellant’s tax overpayments since the same had been claimed as tax credits under the wrong provision of the law. The question that arises here is whether disallowance of tax credits or rejection of a tax overpayment claimed in a certain year leads to automatic- additional order assessments for that year of income.

80. That the assessments raised were not in compliance with Section 31 of the TPA which provides as follows:“(1) Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment”) by making alterations or additions, from the available information and to the best of the Commissioner’s judgement, to the original assessment of a taxpayer for a reporting period to ensure that –a.in the case of a deficit carried forward under the Income Tax Act, the taxpayer is assessed in respect of the correct amount of the deficit carried forward for the reporting period;b.in the case of an excess amount of input tax under the Value Added Tax Act, 2013, the taxpayer is assessed in respect of the correct amount of the excess input tax carried forward for the reporting period; orc.in any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.”

81. That the tax assessment orders issued being income tax assessments were not arising from a tax ‘deficit carried forward’ neither were they arising from an analysis of the ‘correct amount payable in respect of a reporting period’. They were simply issued upon disallowance of overpayments claimed under Section 42 special credits. Notably, the reason for the disallowance is that the same were claimed under the wrong “line” in the iTax ledger and not because the same were not accruing as overpayments.

82. That in 2015, the Appellant was in a tax payable position of Kshs. 72,667,185. 00 and made a tax overpayment by way of withholding tax of Kshs. 72,774,764. 00. Further, the Respondent issued the 2015 assessment on the part of the amount claimed as manual withholding tax certificates and disallowed without making a nexus between the withholding tax credits disallowed and the Appellant’s tax position for the year.

83. That the mere disallowance of a tax credit or an overpayment claimed in a certain year does not, as a matter of course, lead to an additional assessment. In this regard, be it that the Respondent found that the overpayments were not duly claimed (which the Appellant has demonstrated they were) the Respondent ought to have reconciled that disallowance with the Appellant’s tax position for that year and issued an amended assessment.

84. That interest based on an erroneous assessment and on the erroneous position that the Appellant ought to pay a “late payment interest” yet all taxes due had been settled, has no merit in law.

Appellant’s Prayers 85. The Appellant prays for orders that;a.This Appeal be allowed;b.The CIT credits amounting to Kshs. 36,457,934. 00 claimed by the Appellant in the 2015 year of income be allowed as the tax credits were valid and fully supported;c.The Appellant’s utilisation of tax overpayments/ credits which utilisation was in line with the legitimate expectation created by the Respondent’s systems and practice over time be allowed;d.The Respondent’s CIT assessments totalling Kshs. 62,993,693. 00 be vacated forthwith in its entirety with its attendant penalties and interest;e.The costs of and incidental to this Appeal be awarded to the Appellant; andf.Any other orders that the Tax Appeals Tribunal may deem fit.

The Respondent’s Case 86. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal: -i.The Respondent’s Statement of Facts dated and filed on 19th October 2021 together with the documents attached thereto.ii.The Respondent’s written submissions dated 29th June 2022 and filed on 1st July 2022 together with the legal authorities filed therewith.

87. The Respondent stated that the Income Tax credits, amounting to Kshs. 36,457,934, were disallowed as they were filed in the wrong Section. Section 42 of the ITA covers foreign tax credits and arrangements.

88. That the Respondent disallowed utilization of tax overpayments from prior periods as they were filed in the wrong Section and would therefore be misleading. There was no legitimate expectation created by the system as iTax clearly states that Section 42 was meant for foreign tax credits and arrangements.

89. That the demand for interest amounting to Kshs. 26,535,760 is a derivation of the principal tax generated by correcting a wrong and probably misleading entry in the tax return.

90. That the Appellant’s Constitutional right to fair administrative action was not violated as the objection decision confirmed the assessment and also advised the Appellant to consult with the Section 42 Credit Validation Project team at the LTO for reconciliation purposes and clean up.

91. That it was clear from the Respondent’s decision that the process was not meant to deny the Appellant tax credits, but meant to confirm existence of the tax credits and to update the ledger as required.

92. That the Respondent engaged the Appellant in all steps of the process and communicated the findings with reasons thereof while inviting the Appellant for its comments and feedback.

93. That the Appellant has not proved unfairness or any capricious act of the Respondent. The Respondent acted within the law in the execution of its mandate under tax law. Additionally, there is no evidence that the Respondent abused its powers or discretion or that the decision arrived at is so absurd that it lacks logic.

94. That Section 42 of the ITA is very specific in regards to the credits available to taxpayers. Specifically, Section 42(1) of the ITA exclusively deals with offering relief against double taxation in the event of any foreign liabilities as stated below:“42. Computation of credits under special arrangements(1)This section shall have effect where, under a special arrangement, foreign tax payable in respect of income derived by a person resident in Kenya is to be allowed as credit against tax chargeable in respect of that income.”

95. That in Gibbs Africa v Kenya Revenue Authority [2017] eKLR the court observed that,“It is settled law that public bodies, no matter how well-intentioned may only do what the law empowers them to do. That is the essence of the principle of legality, the bedrock of the constitutional dispensation enshrined in the Constitution.”

96. That the Respondent’s decision as in the objection decision was not meant to deny the Appellant its credits the Respondent rightfully communicated to the Appellant that they could not claim the credits under Section 42 of the ITA as this Section is specific with regard to credits available to taxpayers.

97. That in Republic v Kenya Revenue Authority & Another Ex-parte Fontana Limited [2014] eKLR relying on the case Cape Brandy Syndicate v Inland Revenue Commissions (1921) 1 KB 64, it was stated that, “… in a taxing Act one has to look at what is clearly said. There is no room for any intendment.There is no equity about tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look at the language used.”

98. That the Respondent denied the tax credits since there was no special arrangement or foreign tax payable in respect of income derived by a person resident in Kenya to be allowed as credit against tax chargeable in respect of that income.

99. That the Appellant should have followed the correct procedure in law to claim tax overpayment refunds legally owed to them by the Respondent in place of seeking to invoke the powers of this Tribunal to get orders based on an illegality and relying on the wrong provision of the law.

100. That the Respondent cannot be faulted for want of compliance with the law in carrying out its mandate nor can it be faulted for running a defective iTax Income Tax Return Template. This is because the shortfall has been verily covered by Section 47 of the TPA for which the Appellant should have sought precedence before filing this appeal.

101. That the Respondent’s refusal to allow the Appellant’s tax credits claimed is compliant with Section 42 of the ITA.

102. That the Appellant provided a schedule of manual withholding tax certificates but failed to avail the manual certificates as requested by the Respondent hence delaying the reconciliation process.

103. That it is worth noting that the Respondent has been faced with issues in dispute as in the instant appeal and the Respondent has successfully engaged the taxpayers and resolved their applications but under the correct section of the law.

104. That it is the Respondent’s submission that legitimate expectation cannot be created where a taxpayer’s actions are in breach of a clear provision of the law. In the Supreme Court of Kenya case Communications Commission of Kenya & 5 Others v Royal Media Services Limited & 5 Others [2014] eKLR, the learned justices while discussing the principle of legitimate expectation had the following to say at paragraph 268 and 269 of their judgement:“(268)An illuminating consideration of the concept of “legitimate expectation” is found in the South African case, at [paragraph 28], South African Veterinary Council v Szymanski 2003(4) S A 42 (SCA) the Court held as follows:“The law does not protect every expectation but only those which are ‘legitimate’. The requirements for legitimacy of the expectation included the following:i.The representation underlying the expectation must be ‘clear, unambiguous and devoid of relevant qualification’: De Smith, Woolf and Jowell (op cit [Judicial Review of administrative Action 5th ed] at 425 para 8-055). The requirement is a sensible one. It accords with the principle of fairness in public administration, fairness to both the administration and the subject. It protects public officials against the risk that their unwitting ambiguous statements may create legitimate expectations. It is also not unfair to those who choose to rely on such statements. It is always open to them to seek clarification before they do so, failing which they act at their peril.ii.The expectation must be reasonable: Administrator, Transvaal v Traub (supra [1989] (4) SA731(A) at 756I-757B); De Smith, Woolf and Jowell (supra at 417 para 8-037).iii.The representation must have been induced by the decision-maker: De Smith Woolf and Jowell (op cit at 422 para 8-050); Attorney-General of Hong Kong v Ng Yuen Shiu [1983] 2n All ER 346 (PC) at 350 h-j.iv.The representation must be one which was competent and lawful for the decision maker to make without which the reliance cannot be legitimate: Hauptfleisch v Caledon Divisional Council 1963 (4) SA 53 (C) at 59 E-G.”This was also referred to in Walele v City of Cape Town and Others; 2008 (6) SA 129 (C.C.) paragraph 41.

105. Therefore, there can never be a legitimate expectation against clear provisions of the law or Constitution.

106. That the Appellant cannot compel the Respondent to perform a duty that it does not have the power in the law to act upon. In this regard the Respondent relies on Republic v Kenya Revenue Authority ex-parte L.A.B International Kenya Limited [2011] eKLR where the court stated, inter alia, that the Commissioner cannot impose responsibility with motives outside statute.

Respondent’s Prayers 107. The Respondent prayed that the Tribunal;a.Dismisses the Appeal with costs

108. The Tribunal upon due consideration of the pleadings and the written submissions of the parties was of the considered view that the Appeal raises the following single issue for its determination:Whether the Respondent erred by disallowing Corporate Income Tax credits claimed by the Appellant under Section 42 of the Income Tax Act

Analysis and Determination Whether the Respondent erred by Disallowing Corporate Income Tax Credits Claimed by the Appellant under Section 42 of the Income Tax Act 109. This dispute arose from the Respondent’s disallowance of Corporate income tax credits claimed by the Appellant on the iTax system

110. The Appellant contends that the Respondent issued a notice advising all taxpayers, including the Appellant that effective 1st August 2015, all income tax returns had to be filed using the Respondent’s recently rolled out iTax platform. The introduction of the iTax system was to enable taxpayers to make payments for their taxes and file returns online.

111. That pursuant to the notice, the Appellant filed a return for the year of income ended 31st December 2015 on iTax. As per the tax computation and the tax return for the year of income 2015, the Appellant had a taxable income of Kshs. 242,223,952. 00 which resulted in an income tax liability of Kshs. 72,667,185. 00. In the same year, the Appellant made tax payments of Kshs. 72,774,764. 00 (made up of manual withholding tax credits of Kshs. 37,219,303. 00 and iTax withholding tax credits of Kshs. 35,555,461. 00.

112. That in filing the return for the year 2015 year of income on iTax, the Appellant was obligated to fill its financial and tax data into an iTax return upload file which had been prepared by the Respondent. However, the iTax return upload file was incomplete and did not have a separate field for the Appellant to declare valid excess tax credits that were paid off the iTax system. Further, that the valid tax credits were not properly provided for in the upload file.

113. The Appellant avers that, consequently and, in order to remedy this omission in the upload file, when filing the Corporate tax return for the year 2015, the Appellant accounted for the manual withholding tax certificates on iTax by including them in the option provided for under ‘Section 42 Special credits.

114. Thereafter, on 23rd August 2019, the Respondent wrote to the Appellant with regards to a review of tax credits and asked the Appellant to supply certain information. Notably, the Respondent requested for evidence of payment to support the credits claimed under Section 42 in the income tax return filed for 2015 year of income.

115. The Appellant replied to the Respondent via a letter dated 30th January 2021 where the Appellant stated that the credits related to manual withholding tax certificates for the year 2015 which the Appellant had in its possession at the point of filing the 2015 tax return. Further, the Appellant noted that it was undergoing an audit and the requested evidence and information had been shared with the audit team for verification.

116. The Appellant further avers that it validly utilised the said credits against corporate income taxes in the year 2015 and as a result the Appellant’s final tax position was an overpayment of Kshs. 107,578. 00 and this was carried forward to the year 2016. This notwithstanding, the Respondent went ahead to issue an assessment for the year of income 2015 on the basis that it had disallowed the credits supported by manual withholding tax certificates.

117. The Respondent on its part argues that it rejected the Appellant’s explanation, contained in its letter dated 30th January 2021, on the basis that it was not justifiable in line with the provisions of Section 42 of the ITA. The Respondent further states that, it is on this basis that it issued an additional assessment for Corporation tax for the year 2015.

118. From an analysis of the Respondent’s case, it is clear to the Tribunal that the Respondent does not deny that the tax credits existed specifically, in its submissions it states, inter alia, as follows:“…. the objection decision was not meant to deny the appellant its credits….”

119. The Respondent further avers that it advised the Appellant to consult with Credit Validation Project Team at the Respondent’s Large Taxpayers’ Office and provide all the required records for ledger reconciliation exercise to confirm existence of the credits under the correct Section of the law.

120. A review by the Tribunal of the correspondences between the two parties has confirmed that the Respondent did issue guidelines relating to tax credit in a letter dated 23rd August 2019. The letter by the Respondent stated, inter alia, that credits relating to manual certificates would be subjected to payment validation before being approved for recognition in the iTax system and that invalid credits would be disallowed.

121. The Tribunal also established that the Appellant replied to the Respondent’s letter in its letter dated 30th January 2020 where it confirmed that it had submitted relevant documentation for validation of its 2015 tax credits to an audit team that was, at the time, undertaking an audit on the Appellant’s tax transactions which included the said credits. In this regard, the Appellant requested the Respondent to reach out to the audit team in the event that further validation was required and also provided a contact person within the Appellant’s team in case any further clarification or additional information was required.

122. The Tribunal went further to review the extract of the return filed from the iTax portal by the Appellant and established that indeed there was no provision for ‘carried forward’ credits from the previously manual system of accounting for withholding tax as withheld on payments made to the Appellant by its clients.

123. The Tribunal reviewed the provisions of the law in place and established that Section 47 of the TPA provides as follows:“(1)When a taxpayer has overpaid a tax under a tax law the taxpayer may apply to the Commissioner, in the approved form, for a refund of the overpaid tax within one year of the date on which the tax was paid.2. The Commissioner may, for purposes of ascertaining the validity of the refund claimed, subject the claim to an audit.3. The Commissioner shall notify in writing an applicant under subsection1. of the decision in relation to the application.2. Where, in relation to an application for a refund made under this section or made under any other tax law, the Commissioner is satisfied that a taxpayer has overpaid a tax, the Commissioner shall apply the overpayment in the following order—a.in payment of any other tax owing by the taxpayer under the tax law;b.in payment of a tax owing by the taxpayer under any other tax law; andc.any remainder shall be refunded to the taxpayer.”

124. The Tribunal has further established that the TPA’s date of assent was 15th December 2015 while the date of commencement was 19th January 2016. In this regard, by the time this Act was coming into force, the Appellant had already accumulated manual withholding tax certificates from the “legacy system”. Further, that by the time of filing the 2015 return in December 2015, while the TPA had not come into force yet, the Appellant already had, in its possession, manual withholding tax certificates amounting to Kshs. 41,570,953. 00 that were available for utilisation as credits in relation to corporation tax. The Tribunal has reviewed the copies of the same which are attached as part of the Appellant’s pleadings.

125. It is clear to the Tribunal, after reviewing the copy provided of the Appellant’s return on iTax that, at the time of filing, the iTax system was seemingly not configured to accommodate the manual certificates that had been accrued by the Appellant. In this regard, afield was not provided on iTax to enable the Appellant claim its manual certificates.

126. The Tribunal further notes that the Respondent in its pleadings acknowledges that it had advised the Appellant to consult with its Credit Validation Project Team for ledger reconciliation. Further, the Respondent expressly states that the Appellant ought to have followed the correct procedure in law to claim overpayment refunds legally owed to them by the Respondent in place of seeking to invoke the powers of this Honourable Tribunal to get orders based on an illegality and relying on the wrong provision of the law.

127. The above notwithstanding, it is clear to the Tribunal that even as the Respondent claims that a reconciliation process should have been undertaken, the Respondent went ahead to issue a demand letter and eventually an objection decision in a bid to disallow the said credits and assess taxes related to the same period when the credits should have been effected.

128. It is also not lost to the Tribunal that the Appellant categorically states, in its objection decision that, “The process is not meant to deny you the taxpayer credit, but it is meant to confirm the existence and to update the ledger as required.” In this regard, it is clear to the Tribunal that the Respondent stated the above in its objection decision but effectively ended up denying the Appellant its tax credits.

129. Further, it is apparent to the Tribunal that with the change in law to subsume certain processes from the ITA into the TPA, as well as the introduction of the iTax system, certain provisions were not immediately made on iTax, case in point the provision for filing of the manual credits in the instant case.

130. Therefore, the Respondent cannot shift the burden of the lack of provision by its own system to the Appellant. Further, in lieu of this stated provision for credits on iTax, it was incumbent on the Respondent to provide workable alternatives to bridge the gap created by the omission in the system. This would have enabled the Appellant discharge its statutory obligations without having to seek an alternative that was workable within the (new) iTax system.

131. Lastly, the Appellant filed its 2015 return on 31st December 2015 while the Respondent issued the guidelines regarding credits on 23rd August 2019. It is therefore unfounded for the Respondent to issue these guidelines to the Appellant over 3 years after the said return and expect the Appellant to comply with the directive in retrospect. Additionally, it is unfair for the Respondent to then go ahead and disallow the Appellant’s credits on the basis of a process that was informed to the Appellant over 3 years after the return had been filed effectively rendering their manual credits “out of time” even for the proposed refunds under Section 47 of the ITA.

132. Consequently, the Tribunal finds that the Respondent erred by disallowing Corporate Income Tax credits claimed by the Appellant.

Final Decision 133. In view of the foregoing analysis, the Tribunal finds the Appeal to be merited and accordingly proceeds to make the following Orders: -a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 10th August 2021 be and is hereby set aside.c.The Respondent to process and reinstate the Appellant’s CIT credits within ninety (90) days from the date of delivery of this Judgment with a view of enabling the Appellant to utilise the credits appropriately.d.Each Party to bear its own costs.

134. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF FEBRUARY, 2023ERIC N. WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERGRACE MUKUHA - MEMBERBRAHAM K. KIPROTICH - MEMBERJEPHTHAH NJAGI - MEMBER