[2024] KETAT 761 (KLR)

Protex Holdings Limited v Commissioner of Domestic Taxes (Tribunal Appeal E139 of 2023) [2024] KETAT 761 (KLR) (17 May 2024) (Judgment)

Neutral citation: [2024] KETAT 761 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal E139 of 2023

Grace Mukuha, Chair, G Ogaga, Jephthah Njagi, W Ongeti & E Komolo, Members

May 17, 2024

Between

Protex Holdings Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act. Its principal business is to invest in real estate.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. For the performance of its function under Subsection (1), the Authority is mandated under Section 5(2) of the Act to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the KRA Act to assess, collect, and account for all revenues under those laws.

3. The Respondent conducted a Value Added Tax (VAT) compliance review on the operations of the Appellant and raised an additional assessment amounting to Kshs. 4,967,041. 40 for the tax period of August 2017.

4. The Appellant objected to the assessment on 25th May 2019.

5. The Respondent issued its objection decision on 27th February 2023.

6. Dissatisfied with the Respondent’s objection decision, the Appellant filed its Notice of Appeal on 29th March 2023.

THE APPEAL 7. The Appeal is premised on the Memorandum of Appeal dated 11th April 2023 and filed on 12th April 2023 which raised the following grounds: -a.That the Respondent erred in law by imposing Value Added Tax (VAT) on an approach that contravenes the applicable Sections of the VAT Act and Kenyan jurisprudence.b.That the Respondent erred in law by issuing an objection decision contrary to the stipulations of Section 51 of the Tax Procedures Act.

APPELLANT’S CASE 8. The Appellant’s case is premised on the following documents filed before the Tribunal: -a.Its Statement of Facts dated 11th April 2023 and filed on 12th April 2023 and the documents attached to it; andb.Its written submissions dated and filed on 5th December 2023.

9. The Respondent conducted a Value Added Tax (VAT) compliance review on the operations of the Appellant and raised an additional assessment amounting to Kshs. 4,967,041. 40 for the tax period of August 2017.

10. The Appellant objected to the assessment on 25th May 2019.

11. The Appellant averred that the Respondent acknowledged the objection as adequately lodged and issued the Appellant with an objection application acknowledgement number KRA201906478492 dated 25th May 2019. That having accepted the Appellant’s objection, the Respondent is obliged by the law to issue a decision within 60 days.

12. The Appellant stated that the Respondent did not communicate with it on its objection for four years, until on 27th February 2023, when the Respondent issued its objection decision.

13. Dissatisfied with the Respondent’s objection decision, the Appellant filed its Notice of Appeal on 29th March 2023.

14. The Appellant averred that it provided sufficient proof of documentation in support of its objection, only for the Respondent to arrive at a finding that was utterly inaccurate, unreasonable, and unfair to it, four years later.

15. The Appellant submitted that Section 51(11) of the Tax Procedures Act requires that the Respondent ascertain an objection within 60 days. The Appellant further submitted that it is currently accepted legal doctrine enunciated in the case of Cape Brandy Syndicate v Inland Revenue Commissioner (1921) and in the case of Amalgamated Society of Engineers vs. Adelaide Steamshin (1920) 28 CLR 129 at 161-2 that one must only consider what is expressly stated in a taxation Act.

16. Additionally, the Appellant cited the decisions in Republic-vs-Commissioner of Domestic Taxes Ex-Parte, Fleur Investments Limited [20201 eKLR and Equity Group Holdings Limited-vs-Commissioner of Domestic Taxes [2021] eKLR where the High Court held that the Act requires that where the Commissioner has not made an objection decision within 60 days from the date the taxpayer lodged the notice of objection, the objection shall be allowed.

17. The Appellant argued that the Respondent’s determination of an application four years and one month from the date of application is not only an unreasonable delay, but also an abuse of the Respondent’s statutory obligation.

18. The Appellant supported its argument using the following authorities Allen v. Sir Alfred McAlpine & Sons [1968] 1 ALL ER 543, at page 547 and Sabadia v. Dowset Engineering Ltd. 11 MLR 417 at page 420.

19. The Appellant contended that the Respondent issuing an objection decision after the stipulated timelines can be interpreted as ultra vires as it purports the law to be permissive rather than mandatory. The Appellant cited the decisions in the following cases in support of its argument: Equity Group Holdings Limited-vs-Commissioner of Domestic Taxes [2021] and Republic v Public Procurement Administrative Review Board & 2 others [2019] eKLR; Nairobi HC Misc. Civil Application No. 187 of 2018.

20. That departing from the law denies the Appellant’s right to fair administrative action as enshrined under Section 47 of the Fair Administrative Action Act, 2015.

21. The Appellant averred that a legitimate expectation was created that the objection was allowed once the Respondent defaulted to respond within sixty days. To buttress its argument, the Appellant cited De Smith, Woolf & Jowell in Judicial Review of Administrative Action" 6th Edn. Sweet& Maxwell where the authors state:“A legitimate expectation arises when a person responsible for taking a decision has induced in someone a reasonable expectation that he will receive or retain a benefit or advantage. It is a basic principle of fairness that legitimate expectations ought not to be thwarted. The protection of legitimate expectations is at the root of the constitutional principle of the rule of law, which requires predictability and certainty in governments dealing with the public.”

22. The Appellant contended that having lodged its objection by provisions of the Tax Procedures Act, deems its objection application as allowed after the lapse of 60 days as a result of the law.

Appellant’s prayers 23. The Appellant prayed for the Tribunal: -a.To allow the Appeal.b.To set aside the additional assessment raised by the Respondent amounting to Kshs. 4,967,041. 40

RESPONDENT’S CASE 24. The Respondent’s case is premised on the following documents:a.Its Statement of Facts dated and filed on 10th May 2023. b.Its Written Submissions dated and filed on 7th December 2023.

25. The Respondent stated that in the exercise of its mandate conducted a compliance check on the Appellant for the period August 2017, and averred that the Appellant had made an over declaration of purchases.

26. The Respondent stated further that it subsequently issued an additional assessment on the basis of overstated purchases. The Respondent cited Section 24(2) of the Tax Procedures Act which provides that: -“The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.”

27. The Respondent cited Section 43 of the VAT Act as echoed by Section 23 of the Tax Procedures Act, on keeping records which states that: -“(1)A person shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic form or otherwise, in English or Kiswahili of every transaction he makes and the record shall be kept in Kenya for a period of five years from the date of the last entry made therein.(3)Every person required under subsection (1) to keep records shall, at all reasonable times, avail the records to an authorised officer for inspection and shall give the officer every facility necessary to inspect the records.”

28. The Respondent stated that the Appellant failed to establish that the Respondent proceeded on a misconstrued basis in law, contrary to Section 56(1) of the Tax Procedures Act that states that: -“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

29. The Respondent referred to the Tax Procedures Act in Section 51(8) which states that the Respondent is at liberty to make a decision upon considering the evidence and the decisions made shall include rejecting the objection in full.

30. The Respondent asserted that upon receipt of an additional assessment, the burden of proof shifts to the Appellant to disprove the Respondent’s assessment. That ideally, the Appellant is meant to demonstrate that the Respondent erred in coming to the tax position.

31. That in order to shift the burden of proof from itself to the Respondent, the Appellant was meant to raise an objection against the assessment as provided for under Section 51 of the Tax Procedures Act.

32. The Respondent submitted that the Appellant did not align its objection with the guidelines of Section 51(3) of the Tax Procedures Act in the sense that the Appellant did not provide all relevant documents relating to the objection. That due to this failure on the Appellant’s part, the grounds of objection remained mere averments by the Appellant without basis.

33. The Respondent stated that it is the exclusive mandate of the Authority to consider whether an objection has been successful or not. The exercise of this mandate is guided and done in accordance with the law. Therefore, the Appellant’s assertion that the Respondent did not take into account its grounds of objection is untrue.

34. It was the Respondent’s submission that all documents availed by the Appellant in its objection were fully considered before the objection decision was issued.

35. The Respondent reiterated that the onus is on the Appellant to show which information and documents the Respondent omitted in making its decision.

36. On the issue of burden of proof, the Respondent referred to the case of Grace Njeri Githua V Commissioner of Investigations & Enforcement TAT No. 102 of 2018, where the Tribunal emphasized the fact that the burden is on the Appellant to prove the assessment was wrong by stating thus:“In this Appeal, the Appellant has not provided the Tribunal with enough evidence to show that the net income the Respondent has based the tax assessment was not income or is subject to further cost deduction in arriving at a net profit. It is trite law that the burden of proof is on the taxpayer to show that the tax so assessed is not due from her.”

37. The Respondent stated that in the absence of supporting documents, the assessments were confirmed due and payable immediately.

Respondent’s prayers 38. The Respondent prayed that the Tribunal dismisses this Appeal with costs to the Respondent.

ISSUES FOR DETERMINATION 39. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issues for determination as follows:a.Whether the Respondent’s objection decision was validly issued.b.Whether the Respondent was justified in issuing a VAT assessment for the period of August 2017.

ANALYSIS AND FINDINGS 40. The Tribunal proceeds to analyse the issues that call for its determination as hereunder.a.Whether the Respondent’s objection decision was validly issued.1. The Respondent conducted a Value Added Tax (VAT) compliance review on the operations of the Appellant and claimed that the Appellant had made an over declaration of purchases. On this basis, the Respondent raised an additional assessment amounting to Kshs. 4,967,041. 40 for the tax period of August 2017. 2.The Appellant objected to the assessment on 25th May 2019. 3.The Appellant averred that the Respondent acknowledged the objection as adequately lodged and issued the Appellant with an objection application acknowledgement number KRA201906478492 dated 25th May 2019. That having accepted the Appellant’s objection, the Respondent is obliged by the law to issue a decision within 60 days.4. The Appellant stated that the Respondent did not communicate with it on its objection for four years, until on 27th February 2023, when the Respondent issued its objection decision.5. The Appellant averred that it provided sufficient proof of documentation in support of its objection, only for the Respondent to arrive at a finding that was utterly inaccurate, unreasonable, and unfair to it, four years later.6. The Respondent issued an objection decision on 27th February 2023 and being dissatisfied with the decision, the Appellant appealed the decision to the Tribunal.7. The Respondent submitted that the Appellant did not align its objection with the guidelines of Section 51(3) of the Tax Procedures Act in the sense that the Appellant did not provide all relevant documents relating to the objection. That due to this failure on the Appellant’s part, the grounds of objection remained mere averments by the Appellant without basis.8. It was the Respondent’s submission that all documents availed by the Appellant in its objection were fully considered before the objection decision was issued. That in the absence of supporting documents, the assessments were confirmed as due and payable immediately.9. The evidence before the Tribunal shows that the Appellant lodged its notice of objection late, and cited the below reason for the late objection: -“We had the incorrect understanding that our response to the tax demand was an objection.”

50. The Tribunal reviewed all the information and documents adduced by the Appellant and the Respondent in this matter, and found that the Appellant provided evidence of the date it filed its objection along with its application to lodge the objection late. Based on the evidence before the Tribunal, the Respondent acknowledged receipt of the late objection and the application to lodge the objection on 25th May 2019.

51. On the other hand, the Tribunal acknowledges that neither the Respondent’s objection decision nor its Statement of Facts nor evidence adduced by it contested the validity of the Appellant’s objection. Additionally, the Tribunal observes that the Respondent did not provide evidence that it had allowed the Appellant to lodge a late objection on a date different from when the Appellant lodged its objection on 25th May 2019.

52. It is the Tribunal’s considered view that the Respondent, by dint of issuing an objection decision had allowed the Appellant to lodge its notice of objection on 25th May 2019 which initiated the Respondent’s obligation under Section 51(8) of the Tax Procedures Act which provides: -“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".”

53. The Tribunal finds that the Appellant’s objection was allowed by operation of law in accordance with Section 51(11) of the Tax Procedures Act, which, as applicable in May 2019, when the Appellant lodged its objection provided: -“Where the Commissioner has not made an objection decision within sixty days from the date that the taxpayer lodged a notice of the objection, the objection shall be allowed.”

54. The Tribunal relies on the case of Equity Group Holdings Limited v Commissioner of Domestic Taxes [2021] eKLR in its analysis of the effect of an Objection decision not issued within the mandatory timeline, where the court stated that: -“…If the Commissioner did not render a decision within the stipulated period, the objection was deemed as allowed by operation of the law. The statute required that where the Commissioner had not made an objection decision within 60 days from the date the taxpayer lodged the notice of objection, the objection was to be allowed. That meant that the issues that the taxpayer had raised in the notice of objection would be accepted. In case of a tax assessment, it would be vacated.”

55. The Tribunal further buttresses the importance of adherence to timelines by referring to the judgment in Eastleigh Mall Limited v Commissioner of Investigations & Enforcement (Income Tax Appeal E068 of 2020) [2023] KEHC 20000 (KLR) where the Court stated: -“... Parliament in its wisdom knew that in matters tax, time is very crucial as those in commerce need to make informed decisions. If the Commissioner is allowed to exercise his discretion and stay ad-infinitum before issuing an objection decision, the tax payer would be unable to make crucial decisions and plan his/her business properly. The timelines set are mandatory and not a procedural technicality.”

56. The Tribunal thus finds that the Respondent erred in law by failing to issue its objection decision within 60 days of 25th May 2019, when it allowed the Appellant to lodge its objection.

57. Whether the Respondent was justified in issuing a VAT assessment for the period of August 2017.

58. Having determined that the Respondent failed to validly issue its objection decision, the Tribunal did not delve into the second issue for determination as it has been rendered moot.

FINAL DECISION 59. The upshot of the above analysis is that the Tribunal finds that the Appeal is merited and accordingly proceeds to make the following Orders:-a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 27th February 2023 be and is hereby set aside.c.Each party to bear its own costs.

60. It is so ordered.

DATED and DELIVERED at NAIROBI this 17th day of May, 2024. GRACE MUKUHACHAIRPERSONGLORIA A. OGAGA JEPHTHAH NJAGI MEMBER MEMBERDR. WALTER J. ONGETI DR. ERICK KOMOLO MEMBER MEMBERJUDGMENT – TAT NO. E139 OF 2023 – PROTEX HOLDINGS LIMITED –VS- COMMISSIONER OF DOMESTIC TAXES Page 14