[2023] KETAT 950 (KLR)

Pylotech Electricals Limited v Commissioner of Domestic Taxes (Tax Appeal 1097 of 2022) [2023] KETAT 950 (KLR) (8 December 2023) (Judgment)

Neutral citation: [2023] KETAT 950 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1097 of 2022

E.N Wafula, Chair, RO Oluoch, AK Kiprotich, Cynthia B. Mayaka, E Ng'ang'a & B Gitari, Members

December 8, 2023

Between

Pylotech Electricals Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act of the laws of Kenya, and whose principal activity is the supply of electrical items.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, and the Kenya Revenue Authority is mandated with the responsibility for the assessment, collection, receipting and accounting for all tax revenue as an agent of the Government of Kenya. The Respondent is also mandated with the responsibility for the administration and enforcement of the statutes set out in the Schedule to the Act.

3. The Respondent carried out investigations into the affairs of the Appellant resulting in the issuance of preliminary findings on the 29th September 2021 of tax liability amounting to Kshs 320,595,919. 00

4. The Appellant objected to the said assessment on 22nd November 2021 and the Respondent issued its Objection decision on the 29th June 2022 upholding its assessment.

5. The Appellant aggrieved by the Respondent‘s objection decision, lodged its Notice of Appeal at the Tribunal on 1st August 2022.

THE APPEAL 6. The Appellant’s Memorandum of Appeal dated 19th September 2022 and filed on 30th September 2022 was premised on the following grounds of appeal:-a.That the Respondent failed to appreciate that the Appellant's nature of business was the import and sale of electrical household appliances/furniture, and lighting equipment.b.That the taxpayer is a small-scale operator located at Nyamakima and cannot afford to import a full container from China, such other small-scale traders consolidate its funds and use its account to transfer money to China suppliers. Therefore, the Respondent erred in recognizing gross banking as income as some funds relate to different taxpayers. Therefore, not all banking is actually sales.c.That the Respondent did not consider reasonable allowable inputs.d.The Respondent failed to consider allowable expenditure in each year of income incurred in the production of income, if considered will reduce the tax assessed significantly.e.The Respondent cited reasons for rejecting the objection was that it failed to meet the requirements of the Tax Procedures Act 2015, Section 51(3)(c), however, this was not factual as all necessary documents were provided.f.That the grounds for rejecting the objection to the assessments were erroneous and flimsy and that the basis of the computation of the taxes was not clear.g.That the Constitution of Kenya calls for fair administrative action i.e. fair hearing to be accorded to all parties before an escalated action is taken. That the taxpayer was not accorded such treatment before the assessments were raised.h.That the taxes could have been computed on the wrong premises and proper explanations were not received to this effect resulting in a misleading and non-factual assessment.i.That the assessment on the taxpayer was exorbitant, punitive and unrealistic for the type of business undertaken by the taxpayer.j.That the assessment was intended to punish the taxpayer and kick him out of business.

Appellant’s Case 7. The Appellant’s case was premised on the following documents:-a.Statement of Facts dated 19th September 2022 and filed on 30th September 2022 together with documents attached thereto.b.Written submissions dated 27th September 2023 and filed on 28th September 2023.

8. That the Respondent made an additional assessment on 29th September 2022 on Income tax and VAT for tax periods 2015, 2016, 2017, 1018, 2019 and 2020 amounting to Kshs. 128,370,183 and Kshs. 69,903,106. 00 respectively.

9. That the Appellant felt dissatisfied with the assessment and hence applied for an objection on the 25th January 2022, unfortunately the Respondent issued an Objection Decision on 29th June 2022.

10. That the Appellant lodged a Notice of Appeal against the additional assessment on the 1st August 2022.

11. That the Respondent erred in its decision to issue the Appellant with additional tax assessment concerning income tax company and VAT as the Respondent failed to appreciate that the Appellant's business was to consolidate funds from various small-scale traders in order to import full containers from China.

12. That the Respondent failed to consider allowable expenditure and input VAT in each year of income inured in the production of income, which would have reduced the tax assessed significantly.

13. The Appellant submitted that Respondent’s assessment was erroneous because it did not appreciate the nature of its business which was in the importation and retail sale of electrical household appliances/furniture and lighting equipment.

14. That it was involved in a consolidation business where it would come together with hundreds of other small-scale traders to import electrical items from China. That the suppliers prefer to deal with one trader who would consolidate the orders of the small traders before placing the order with the various suppliers.

15. The Appellant averred that the various traders would pay the cost of purchase, consolidated through the Appellant who would then pay the cost, freight and customs duties for the consolidated cargo. That subsequently, upon arrival, the goods are distributed to the various small-scale traders as per their orders to the Appellant consolidator. The Appellant collects its own goods.

16. It was the Appellant’s position that the goods were merely imported under its name for convenience but did not belong to it.

17. The Appellant clarified that the various amounts of money in its accounts do not constitute income to the company or its directors. The company was just a conduit. That the monies deposited by small-scale traders through its bank accounts were contribution monies deposited by various traders for importation of their products and the only role played by the Appellant was to pay out the contributed amounts for the consignment.

18. It invoked Section 3(I) of the ITA to argue that income ought to be charged only on income that has accrued or been derived from Kenya and that gross banking should thus not be considered as income. It relied on the case of Motaku Shipping Agencies Limited v Commissioner of Income Tax (2014) eKLR to emphasize this point.

19. It gave the following as examples of payments that it received from 3rd party traders to facilitate their trade:a.On 29th April 2015, Nancy deposited Kshs 70,000/-b.On 6th May 2015, Nancy deposited Kshs 230,000/-c.On 30th July 2015 Rachuonyo Electrical deposited Kshs 74,100/-d.On 17th September 2015, Rachuonyo Electrical deposited Kshs 27,280/-e.On 26th July 29-016, a trader deposited Kshs 340,000/-f.On 29th July 2016 traders deposited Kshs 30,000/-; Kshs 20,000/-; Kshs 35,000/- and 27110/-g.On 12th November 2016 traders deposited Kshs 90,000/- and Kaha 159,570/-h.On 23rd September 2017 a trader Njenga deposited Kshs 270,000/-i.On 25th September 2017 the same trader Njenga deposited another Kshs 50,000/- and on the even date deposited Kshs 50,000/-j.On 27th September 2017, another trader deposited Kshs 60,000/-k.On 24th April 2018 a trader deposited Kshs 79,000/-; on the same date two other traders deposited Kshs. 300,000/- and Kshs 500,000/-

20. The Appellant submitted that the Respondent did not determine the actual business income due to the taxpayer and deductions due thereof as per the provisions of Section 15 of ITA and it thus erred by charging tax on gross non-banking income that was not subject to deductible expenses.

21. The Appellant asserted that it presented a reconciliation to show several deposits in its account were not income but were instead monies meant for the importation of consolidated cargo on behalf of third-party importers.

22. It was also its position that the director's salary and other payments were also not deducted as allowable expenses from the company’s bank Account.

23. The Appellant stated that the director's bank account is a personal account and the account holders are free to use it as it pleases them. That this meant that such accounts would have various transactions not related to the income of the company as defined under the Income Tax Act and thus not subject to PAYE.

24. It was also its view that the company and the directors are separate entities with each having separate tax obligations

Appellant’s Prayer 25. Flowing from the above arguments the Appellant’s prayed to the Tribunal for orders thata.The income tax assessments be set aside.b.VAT assessed to be set aside.c.All the information provided be considered in making the correct determination of the matters at hand.d.Any accrued interests and penalties as a result of the assessment be waived.

Respondent’s Case 26. The Respondent premised its case on its :a.Statement of Facts filed and dated on 28th October 2023. b.Submissions dated 6th April 2023 and filed on the same date.

27. That it is misleading for the Appellant to allege that it was not furnished with sufficient explanation on its finding or that it was not given an opportunity for a fair hearing.

28. The Respondent affirmed that it established the Appellant’s income from the total bank deposits which it adjusted with opening and closing debtors and output tax in its iTax system to arrive at the adjusted taxable income for Corporation tax. The adjustments were as shown in the table below:2015 2016 2017 2018 2019 2020 Totals

Total Bank Deposits 121,360,502 104,552,283 97,898,961 68,617,536 101,371,836 59,063,489 552,864,607

Add Closing debtors 45,575 25,275 313,882 24,850 74,500 2,674,800 3,158,882

Less Opening debtors 0 45,575 25,275 313,882 24,850 74,500 484,082

NetBankings 121,406,077 104,531983 98,187,568 68,328,504 101,421,486 61,663,789 555,539,407

Less Output tax 891,221 2,664,197 3,234,800 3,230,623 3,822,421 2,684,676 16,527,938

Established Banking Income 120,514,856 101,867,786 94,952,768 65,097,881 97,599,065 58,979,113 539,011,469

29. That the established company income was then compared with what the Appellant had declared in IT2C and it was found that the Appellant had under-declared income in IT2C as shown in the table below:Year Established Banking Income Declared sales in IT2s Undeclared Income (variance)

2015 120,514,856 10,302,910 110,211,946

2016 101,867,786 17,103,990 84,763,796

2017 94,952,768 20,737,558 74,415,210

2018 65,097,881 20,191,398 44,906,483

2019 97,599,065 24,610,900 72,988,165

2020 58,979,113 18,164,102 40,815,011

30. That the established banking income of the directors was then summarized and compared with the income that the directors declared in their IT1 returns and the variance established thereof was subjected to PAYE on each director.

31. The Respondent asserted that it issued its decision on the 29th June 2022 and that the Appellant was required to lodge a Notice of Appeal by 29th July 2022 failure to which it would have been required to seek leave to file appeal out of time. That the Appellant having not sought leave rendered the whole Appeal invalid.

32. It posited that the the Appellant bore the burden to produce evidence to sufficiently explain the variance but the the Appellant failed to do so hence its reason for refusing to make the adjustments.

33. The Respondent submitted that the Memorandum of Appeal was filed on 30th September 2022 which was ninety (90) days from the date of issuance of the Objection decision and no plausible explanation has been given for the delay.

34. That the Appeal was incompetent for being filed without a Notice of Appeal contrary to Section 12 of the Tribunal Act which provides that an appeal can only be preferred at the Tax Appeal Tribunal upon giving notice to the Respondent.

35. That the Appellant has not adduced any evidence or any reasonable reason why it should be granted leave to appeal out of time as was explained in the Case of Weston Hotels Limited vs Commissioner of Domestic Taxes TAT No. 176 of 2021 (2022) eKLR.

36. That statutory timelines are put in place for a purpose and all litigants must endeavour to comply with them as was stressed by the courts in the case of Commissioner of Domestic Taxes vs Mayfair Insurance Company Limited (2017) eKLR.

37. The Respondent submitted that the Appellant outrightly flouted the rules and procedure set out in statute and it therefore does deserve the audience of the Honourable Tribunal because it failed to file its Appeal within the provided timelines of 30 days.

38. The Respondent stated that it used the available information and its best judgment to come up with the assessment because the records that it had requested were not availed. It specifically stated that:-a.The Appellant submitted schedules of no-sales banking from the company bank accounts which were unsupported and hence the reason why it could not make adjustments based on unsupported documents.b.Concerning the imported goods, the Appellant only provided a list of entries that the company alleged were not adjusted in the computation of the purchases. However, the Appellant did not provide evidence to demonstrate that the costs claimed were incurred and as such no adjustments could be made.c.The Appellant only made assertions with no evidence. That the Appellant failed to discharge its burden by adducing evidence as was stated in Alfred Kioko Muteti vs Timothy Miheso & Another (2015) eKLR.d.The Appellant only provided schedules for non-sales bankings from the company bank accounts for consideration without supporting documents to verify its content.

39. The Respondent submitted that its objection decision complied with the rigours of Section of the TPA to the extent that it indicated the reasons for refusal of the objection to be that;a.The Appellant failed to provide documents in support of the non-banking sale to warrant any adjustments; andb.The Appellant failed to provide evidence to demonstrate that the costs claimed were incurred and as such no adjustments are warranted

40. The Respondent stated that it communicated to the Appellant directing it to provide the necessary documents through numerous correspondences and engagements but the Appellant failed to respond to the various requests resulting in the assessment being upheld.

Respondent’s prayer 41. That the Appeal be dismissed with costs.

Issues For Determination 42. Having gone through the parties' pleadings and filed documents the Tribunal has identified the following as the issues that fall for determination.a.Whether the Appeal is validb.Whether the Respondent’s Objection Decision dated 29th June 2022 was justified.

Analysis And Finding 43. The Tribunal shall now proceed to analyse the identified issues for determination in the following sequential order.

a)Whether the Appeal is valid 44. The Appellant has argued that this Appeal is invalid for reasons that a Notice of Appeal was never filed and that the Memorandum of Appeal on record was filed on 30th September 2022 which was ninety (90) days from the date of issuance of the Objection decision and no plausible explanation has been given for the delay.

45. The record in this Appeal shows that the Appellant filed its Notice of Appeal dated 29th July 2022 on the 1st August 2022.

46. The Objection decision in issue was issued on the 29th June 2022 meaning that the Notice of Appeal ought to have been filed on or before the 29th of July 2023.

47. Section 13 of the TAT Act provides as follows regarding the filing of appeals before the Tribunal:-“(1)A notice of appeal to the Tribunal shall—(a)be in writing or through electronic means;(b)be submitted to the Tribunal within thirty days upon receipt of the decision of the Commissioner.”

48. The Appellant herein was thus late in filing its Appeal by about 2 days. It was hence required to seek for leave to file its Appeal out of time under Section 13(3) of the TAT Act. This was not done. The consequence of this is that it does not have a valid appeal on record from which the prayers it seeks can emanate.

49. The Supreme Court stated as follows regarding a Notice of Appeal in the case of Nicholas Kiptoo Arap Korir Salat vs Independent Electoral and Boundaries Commission & 7 Others [2014] eKLR, :“A Notice of Appeal is a primary document to be filed outright whether or not the subject matter under appeal is that which requires leave or not. It is a jurisdictional pre-requisite.” (Emphasis added)

50. Similarly the High Court also stated as follows in regard to timelines of matters of tax disputes in Equity Group Holdings Limited v Commissioner of Domestic Taxes [2021] eKLR as thus:-“The TAT premised its decision on the provisions of Article 159 (2) (d) of the Constitution which requires courts to determine matters without undue regard to technicalities of procedure. On the face of a clear statutory dictate, I do not see how the TAT could term the express statutory edict as a matter of procedural technicality. This was a gross misapprehension of the law. Article 159 (2) (d) of the Constitution was not meant to oust express statutory provisions and to open a window for disregard of statutory requirements.”

51. The above cited authorities have made it clear that compliance with timelines are not mere procedural issues that can be waived away because the Appellant was late by only 2 days. Compliance with timelines comprise substantive law which must be complied with.

52. Based on the above analysis, the Tribunal finds and holds that the Appellant’s failure to file its Notice of Appeal in time and its failure to seek leave of the Tribunal to regularise it means that there was no jurisdiction granted to the Tribunal to consider this Appeal. It has to down its tool.

53. Having held that the Tribunal lacks jurisdiction to hear and determine this matter, it follows that the other issues that were identified for determination have been rendered moot.

Final Decision 54. The upshot of the foregoing analysis is that the Appeal is incompetent and the Tribunal accordingly proceeds to make the following Orders:-a.The Appeal be and is hereby struck out.b.Each party is to bear its own costs.

55. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF DECEMBER, 2023. ERIC NYONGESA WAFULA............CHAIRMANDR. RODNEY O. OLUOCH............MEMBERABRAHAM K. KIPROTICH...........MEMBERCYNTHIA B. MAYAKA..................MEMBEREUNICE NG’ANG’A........................MEMBERBERNADETTE GITARI...................MEMBER