[2024] KETAT 841 (KLR)

Prime Timber Yard Limited v Commissioner of Investigations and Enforcement (Tax Appeal E206 of 2023) [2024] KETAT 841 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 841 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E206 of 2023

RM Mutuma, Chair, M Makau, EN Njeru, B Gitari & AM Diriye, Members

June 28, 2024

Between

Prime Timber Yard Limited

Appellant

and

Commissioner of Investigations And Enforcement

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act in the Republic of Kenya, a registered taxpayer and carries on the business of sale of timber.

2. The Respondent is a principal agent of the Government of Kenya appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The dispute in this Appeal arose when the Respondent issued the Appellant additional assessments for Value Added Tax (VAT), Income Tax, and Pay As You Earn (PAYE) on 23rd December 2022, amounting to a cumulative tax obligation of Kshs. 48,222,128 for the period spanning from 2015 to 2020.

4. The Appellant objected to the assessment vide a letter dated 3rd January, 2023 and the Respondent confirmed the assessment vide an Objection Decision dated 27th March 2023.

5. The Appellant being aggrieved by the Objection Decision issued by the Respondent, lodged this Appeal, filing its Notice of Appeal dated and filed on 25th April 2023.

The Appeal 6. The Appellant’s Memorandum of Appeal dated 8th May 2023 and filed on 9th May 2023 is premised on the following grounds, that;a.The Respondent erred in fact and law by charging Income Tax on non-existent income contrary to Section 3 (1) and Section 3 (2) of the Income Tax Act.b.The Respondent erred in fact and law by charging Value Added Tax (VAT) on non-existent income contrary to Section 5 of the Value Added Tax Act.c.The Respondent erred in fact and law by disallowing genuinely incurred expenditure contrary to Section 15 of the Income Tax Act.d.The Respondent confirmed the assessments without due regard to all records/documents, explanations and information provided, thereby failing to appreciate all issues presented and raised by the Appellant before confirming the assessment.

Appellant’s Case 7. The Appellant’s case is premised on its;a.Statement of Facts dated 8th May 2023 and filed on 9th May 2023 together with the documents attached thereto; and,b.Written submissions dated and filed on 18th January 2024.

8. The Appellant submitted that it was issued with additional assessments on 22nd December 2022 on VAT, Income Tax and Paye to which the Appellant objected to on 3rd January 2023, subsequently the Respondent issued its Objection Decision on 27th March 2023.

9. The Appellant stated that the assessed taxes were on non-existent income and the Respondent used the banking approach to determine the alleged non-declared income but failed to consider non-trade/income items appearing on bank statements.

10. That the Appellant argued that the Respondent contravened the provisions of Section 3 (1) and 3 (2) of the Income Tax Act by subjecting the Appellant’s bank credits to taxation under the assumption that all bank deposits constituted income.

11. The Appellant averred that the Respondent erred by disallowing genuinely incurred expenses, which were wholly and exclusively incurred in the generation of income contrary to Section 15 of the Income Tax Act.

12. The Appellant asserted that deposits made for the purpose of enhancing creditworthiness for loan approvals do not fall within the categories of taxable income delineated by the Act.

13. That furthermore, the Appellant stated that the Respondent disregarded the actual turnover reported in the Appellan’s financial statements and tax returns.

14. The Appellant asserted that despite the submission of requested documents, such as bank statements and financial records, the Respondent’s reliance solely on the bank analysis test led to an arbitrary increase in the Appellant’s turnover. This approach, the Appellant argued, is inconsistent with basic accounting principles and has the potential to prejudice taxpayers, as established in the case of Afya X-Ray Centre Ltd vs. The Commissioner (Appeal No 70 of 2017).

15. That the Appellant submitted that the Respondent failed to consider the Appellant’s expenses adequately in formulating its assessment.

16. That the Appellant contended that despite the provision of relevant documentary evidence, including bank statements and audited financial statements, the Respondent’s decision to treat certain items, such as loans and overdrafts, as taxable income is deemed erroneous, contravening Section 3 (2) of the Income Tax Act, which delineates the types of income subject to taxation.

17. That in support of these contentions, the Appellant relied on the case of Republic vs. Commissioner of Income Tax Ex Parte SDV Transami (Kenya) Limited [2005] eKLR, where it was held that tax assessments must be clearly delineated and consistent with the provisions of the law.

18. Additionally, the Appellant referred to the case of Republic vs. Kenya Revenue Authority Ex parte Bata Shoe Company (Kenya) Limited [2014] eKLR, which emphasized the obligation of tax authorities to adhere to the express provisions of tax laws and refrain from speculative interpretations.

19. That the Appellant asserted that the Respondent’s failure to consider the provided documents and expenses, coupled with reliance on the bank analysis test, rendered the assessment prejudicial and excessive.

20. The Appellant seeks the vacating of the Respondent’s assessment based on those grounds.

Appellant’s Prayers 21. The Appellant prayed that the Tribunal;i.Allows this Appeal;ii.Annuls the additional assessments aforesaid based on the grounds above, as well as the information contained in the Statement of Facts attached and upholds the Appellant’s Notice of Objection; and,iii.Awards costs of this Appeal to the Appellant.

The Respondent’s Case 22. The Respondent’s case is premised on its;a.Statement of Facts dated and filed on 9th June 2023 together with the documents attached thereto; and,b.Written submissions dated 9th January 2024 and filed on 10th January 2024.

23. The Respondent contended that it initiated tax investigations covering the period 2015 to 2021, aiming to ascertain undeclared taxable income, income as per banking analysis, correct value of imports, and other aspects of the Appellant’s business.

24. The Respondent asserted that it conducted a thorough analysis of the Appellant’s bank deposits, comparing them with declared income and expenses and scrutinized the Appellant’s declared purchases, salaries, and director’s remuneration.

25. The Respondent claimed to have utilized various tests to establish the Appellant’s taxable income, including comparisons between income tax returns, VAT returns, and bank statements. Based on these analyses, the Respondent issued assessments relating to Corporation Tax, VAT and PAYE.

26. The Respondent averred that its assessments were grounded in the provisions of the Income Tax Act, the Tax Procedures Act, and general accounting principles.

27. That following objections from the Appellant, the Respondent considered the provided documentation but ultimately confirmed the assessments, asserting that the burden of proof rested with the taxpayer to demonstrate any errors or excessiveness in the assessments.

28. The Respondent justified its actions under Section 31 of the Tax Procedures Act, which allows the use of best judgment in tax assessments.

29. The Respondent contended that the Appellant’s failure to provide sufficient evidence to counter the assessments rendered the assessments lawful and procedurally fair.

30. The Respondent also emphasized on the Appellant’s obligation under Section 59 (1) of the Tax Procedures Act to furnish detailed supporting documentation during tax proceedings.

31. The Respondent maintained that the assessments were based on available information and were not contrary to the law.

32. The Respondent aligned its position with legal principles established in various cases, including Republic vs. Commissioner of Income Tax Ex Parte SDV Transami (Kenya) Limited [2005] eKLR, which underscored the importance of clarity and adherence to statutory provisions in tax assessments.

33. That additionally, the Respondent relied on Section 56 (1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, which placed the burden of proof on the taxpayer to demonstrate the correctness of tax assessments.

34. That in conclusion, the Respondent asserted that the assessments were valid, lawful, and grounded in statutory provisions and that the Appellant’s objections lacked sufficient evidentiary support.

35. The Respondent in its written submissions raised three issues for determination, namely;i.Whether the Notice of Objection was validly lodged;ii.Whether the additional assessments were legally justified; and,iii.Whether the Appellant discharged its burden of proof.

36. The Respondent submitted that it issued additional assessments on 23rd December 2022 and thereafter the Appellant lodged its objection on 7th February 2023. The Respondent averred that upon consideration it approved the same on 3rd January 2023 and requested the Appellant to validate its Objection by providing documents.

37. The Respondent submitted that the Appellant failed to validate its objection and therefore there was no valid Objection which informed the Respondent’s decision of 27th March 2023.

38. The Respondent submitted that it noted that the Applicant had declared more purchases in VAT3 as compared to declarations made in IT2C for the period under review hence the under declared income was added back in computing for the Corporation Tax due.

39. The Respondent submitted that the accounts and salaries declared in the PAYE returns established a variance of Kshs. 991,834. 00 as such, the analysis established that the Appellant had not declared salaries in the year 2015 to 2020.

40. The Respondent in fortifying its position in law, relied on the following cases;i.Kotile General Contractors Company Limited vs. Commissioner of Domestic Taxes [2020] eKLR.ii.Digital Box Limited vs. Commissioner of Investigations & Enforcement [2019] eKLR.iii.Osho Drapers Limited vs. Commissioner of Domestic Taxes [2022] eKLR.iv.Commissioner of Domestic Services vs. Galaxy Tools Limited [2021] eKLR.v.Prima Rosa Flowers Limited vs. Commissioner of Domestic Taxes [2019] eKLR.vi.Ushindi Exporters Limited vs. Commissioner of Investigations and Enforcement (Tax Appeals Tribunal No. 7 of 2015).vii.Commissioner of Domestic Taxes vs Metoxide Limited [2021].

Respondent’s Prayers 41. The Respondent called upon the Honourable Tribunal to find that;i.The Respondent’s decision dated 27th March 2023 was proper and in conformity with the provisions of the law and uphold the same.ii.This Appeal is devoid of merit and ought to be dismissed with costs to the Respondent.

ISSUES FOR DETERMINATION 42. The Tribunal upon the careful consideration of the Pleadings, Statements of Facts and submissions made by the parties respectively, was of the view that the issues that recommend themselves for its determination are;i.Whether the Respondent’s Objection Decision issued on 27th March 2023 was proper in law.ii.Whether the Appellant fulfilled its obligation in discharging the burden of proof?

Analysis And Determination 43. The Tribunal shall proceed to analyze and determine the issues as follows;

i. Whether the Respondent’s Objection Decision issued on 27th March 2023 was proper in law. 44. It was the Appellant’s submission that it was issued with an additional assessment on 23rd December 2022 by the Respondent, to which the Appellant objected to on the 3rd January 2023.

45. From the Appellant’s pleadings, the Objection Decision was issued on 27th March 2023, which the Appellant submitted was issued beyond the statutory timelines.

46. Conversely, the Respondent asserted that the Objection contravened the provisions of Section 51 (3) of the Tax Procedures Act, particularly that the Appellant had not supplied the documents in support of its Objection.

47. That the Respondent vide the correspondence dated 11th January 2023 notified the Appellant that its Objection was invalid and requested it to validate its Objection, however the Appellant failed to avail all the documents but availed some documents vide the correspondence dated 1st February 2023 as result whereof the Respondent issued its Objection Decision.

48. It was the Respondent’s position that its Objection Decision was issued properly and within the legal provisions as provided for under the Tax Procedures Act.

49. The Respondent’s manner of management in dealing with the Objection Decisions is provided for under Section 51 (11) of the Tax Procedures Act, noting that the Finance law is amended annually, Section 51 (11) of the TPA as at the time of making this decision provided as follow;“(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed.”

50. It is to be noted that, Section 51 (11) (b) of the Tax Procedures Act prior to 1st July 2022, made a provision for the Respondent to request for the supply of supporting documentation from the Appellant, the section (as was then) provided;“(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of—(a)the notice of objection; or(b)any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”

51. Flowing from the above, the Respondent was therefore mandated to deliver an Objection Decision within 60 days from the last date of request of any further information by the Respondent. The legal implication of the above proviso was that the Respondent could then reset the clock as relates to the statutory timelines relating to the issuance of the Objection Decision.

52. As at the date of the issuing of the Objection Decision subject of this appeal, the provisions of Section 51 (11) (b) of the Tax Procedures Act were not in force and were unavailable for the application by the Respondent.

53. Section 51 (4) of the Tax Procedures Act, governs the manner by which the Respondent is to deal with objections that it deems as invalidly lodged, the section provides;“Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall notify the taxpayer within 14 days in writing that the objection has not been validly lodged”

54. A review of the pleadings indicate that the Respondent asserted that it complied with the provisions of Section 51 (4) of the Tax Procedures Act, whereas the Tribunal has not sighted the notice issued on 11th January 2023, the Appellant has not disputed its existence or receipt thereof.

55. In instances where a taxpayer’s objection is treated as invalid by virtue of being inconsistent with the provisions of Section 51 (3) of the TPA and has been granted the opportunity to validate the invalid objection, fails or neglects to validate the same the Respondent may invalidate the objection and confirm the assessment(s).

56. It is not lost on the Tribunal that the power to treat and/or deemed an invalid objection as having been validated is the sole preserve of the Respondent.

57. As observed herein above, the Respondent submitted that the Appellant, despite being requested to furnish the Respondent with supporting documents with the view of validating its invalid objection, the Appellant failed to do so. Therefore, it is clear that the Appellant did not at any instance validate its objection.

58. It is to be noted that, whereas the Respondent is not precluded to issue an Objection Decision to an objection that it has treated and/or deemed as invalid, there legal implications to that action.

59. It is the Tribunal’s considered view that Objection Decisions as outlined under Section 51 (11) of the TPA, ought to be issued upon objections that are valid or otherwise have been treated and/or deemed as valid. In the instances where the Respondent elects to issue an Objection Decision to an invalid objection, this action and/or conduct of the Respondent sanitizes and treats the invalid objection as a valid objection.

60. The Respondent, by electing to issue an Objection Decision as opposed to issuing a notice of invalidation, placed itself in a position that required it to make the Objection Decision within the statutory timelines of 60 days from the date of the acknowledgement of the Notice of Objection and not on the date of receipt of supporting documents. In any event, Section 51 (11) (b) of the TPA had been deleted and no longer had any legal effect.

61. It therefore follows, that the Respondent having treated the Appellant’s Objection as valid ought to have issued the Objection Decision on or before 3rd March 2023. The net effect of such failure was that the Appellant’s objection was deemed as allowed by operation of the law.

62. Consequently, the Respondent’s Objection Decision issued on 27th March 2023 was issued beyond the statutory timelines, was not proper in law and the Appellant’s objection was deemed as allowed by operation of the law.

63. Having determined that the Objection Decision was not proper in law having been issued beyond the statutory timelines, the Tribunal shall not delve into the other issue for determination as the same have been rendered moot.

Final Determination 64. The Appellant’s Appeal Being Merited, The Tribunal Makes The Following Orders;A.The Appeal Be And Is Hereby Allowed.B.The Respondent’s Objection Decision Dated 27Th March 2023 Be And Is Hereby Set Aside.C.Each Party To Bear Their Own Costs.

65. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 28THDAY OF JUNE 2024ROBERT M. MUTUMACHAIRPERSONMUTISO MAKAU ELISHA N. NJERUMEMBER MEMBERBERNADETTE M. GITARI ABDULLAHI DIRIYEMEMBER MEMBER