[2017] KEHC 9113 (KLR)

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA AT NAIROBI

JUDICIAL REVIEW DIVISION

MISCELLANEOUS CIVIL APPLICATION NO. 668 OF 2007

REPUBLIC

VERSUS

THE COMMISSIONER OF DOMESTIC TAXES

(large taxpayers office)……….................................RESPONDENT

EX-PARTE

UNILEVER TEA KENYA LIMITED ………......................APPLICANT

JUDGEMENT

Introduction

1. By a Notice of Motion dated 9th October, 2007, the ex parteapplicant herein, Unilever Tea Kenya Limited, seeks the following orders:

1) An order of Certiorari to remove into the High Court for purposes of it being quashed the decision and order of the Commissioner of Domestic Taxes dated 8th March 2007 wherein he has demanded payment of Value Added Tax on the Applicant’s Local Sales for export.

2) An order of Mandamus to compel the Commissioner of Domestic Taxes to refund the excess input Value Added Tax to the Applicant which amounted to Kshs.241,000. 00 as at 1st December 2006.

3) An order the Respondent do pay the cost of the proceedings.

Ex ParteApplicant’s Case

2. According to the applicant, formerly known as Brooke Bond Kenya Limited, it has been producing and manufacturing tea in Kenya for more than 80 years during which time it has at all times conducted its business with integrity and under independent professional advice.

3. In these proceedings the applicant seeks to quash the Respondent’s decision dated 8th March 2007 wherein it demanded payment of Value Added Tax (“VAT”) and confirmed the applicant’s assessment dated 21st December 2006.

4. Based on legal advice, the ex parte applicant averred that the Respondent is exceeding his jurisdiction by demanding documentation that is statute barred as more than five years have lapsed since the supplies to which the decision is related were made and the assessment dated 21st December 2006 was issued. Based on the same advice, the ex parte applicant averred that as it was not the exporter of the tea, there was no statutory requirement upon the Applicant to provide proof of exportation and the Respondent had no jurisdiction to demand such proof from the Applicant.

5. The Applicant also seeks an order of Mandamus compelling the Respondent to refund the excess input VAT which has been wrongfully and unlawfully withheld by the Respondent.

6. The applicant averred that with regard to sales of manufactured tea, it has, like all other tea producers who are members of the East Africa Tea Trade Association (hereinafter referred to as EATTA) and following the industry practice, sold its tea for export through the Mombasa tea auction and to licensed tea exporters. It was averred that during the Assessment Period, which is the period in contention, approximately 99% of the tea produced at the Applicant’s Kericho factories was sold into the export market either through sales to the Mombasa tea auction centre which accounted for approximately 58% of all sales, direct exports to buyers abroad which accounted for approximately 34% of all sales, or through direct private treaty sales to third party exporters (‘Local Sales for Export’) which accounted for approximately 7% of all sales. The remaining 1% was sold into the local market through sales to Kenya Tea Packers Limited (‘Ketepa’) and factory sales. However, all the Local Sales for Export were treated as zero rated.

7. According to the applicant, prior to February 1999, no conditions had been prescribed by the Respondent under Item 6 of Part A of the Fifth Schedule of the VAT Act (Cap 476). Specifically, there was no requirement either under the applicable legislation or arising from any communication by the Respondent that tea producers should request or retain any form of proof of export in order for sales to exporters to be zero rated under Item 6 of the Fifth Schedule of the Act. It was deposed that the Applicant’s Local Sales for Export were made to known exporters and in keeping with the industry practice, no form of proof of export was requested or retained. Further, the Respondent processed and paid VAT refunds of excess input VAT arising from zero rated sales including Local Sales for Export without any requirement for additional or supporting documentation to be provided by the Applicant in respect of those sales.

8. According to the applicant, in August 1998, following changes introduced by Finance Bill 1998, clarification was provided in respect of sales made to the tea auction centres and the Kenya Revenue Authority (hereinafter referred to as “KRA”) issued notices to the effect that auction sales to exporters would only be zero rated if the tea purchased was actually exported. This led to discussions with EATTA culminating in an agreement between the KRA and the EATTA that all sales to exporters, whether through the auction or otherwise, would only be zero rated on the basis of Remission Certificates which the KRA would issue to exporters who had satisfied the requirements including the requirement to execute a security bond in respect of the consignment in question as per the seller’s pro forma invoice. This was communicated to all members of the EATTA by an EATTA circular dated 26th January 1999. Accordingly, from February 1999 the Applicant only treated Local Sales for Export as zero rated where the exporter produced a valid Remission Certificate or exemption letter failing which VAT would be charged at the applicable rate.

9. The applicant averred that in November 1999, the KRA carried out an audit at the Applicant’s offices in Kericho and some time after the completion of the audit, the KRA raised the issue of Remission Certificates relating to Local Sales for Export. It was brought to the KRA’s attention by the Applicant that Remission Certificates were only required from February 1999 and that accordingly, no Remission Certificates had been obtained in respect of sales prior to that date. However, notwithstanding that there was no requirement to provide any form of proof of export prior to February 1999, in order to expedite the formal conclusion of the audit, the Applicant offered to obtain letters from the third party exporters in question confirming the export of the tea sold which offer KRA agreed to and the Applicant procured such letters from five exporters.

10. However by a letter dated 20th December 2000, the KRA wrote to the Applicant outlining the issues arising from the 1999 audit and listed amongst these that Remission Certificates or exemption letters relating to Local Sales for Export had not been availed by the Applicant. Following meetings at which the industry practice prior to February 1999 and the introduction of Remission Certificates in that month were again discussed, the Applicant wrote to the KRA on 30th March 2001, confirming that they had sought Remission Certificates from their customers and reiterating that the Applicant had followed industry practice and the applicable legislation at the time which did not require Remission Certificates or any other proof of export in order for Local Sales for Export to be zero rated. No response was however received thereto and the KRA continued to process the Applicant’s VAT refund applications in respect of excess input VAT arising from zero rated sales, leading the Applicant to believe that the matter had been resolved.

11. It was averred that on 4th March 2002, a year after the Applicant’s last letter to the KRA and more than two years after the audit, the KRA wrote to the Applicant informing them that the Local Sales for Export would be treated as vatable and demanded tax in the amount of Kshs. 682,060,936, being Kshs. 154,555,987 principal tax and Kshs. 201,620,320 additional tax. The KRA also proceeded to attach the Applicant’s approved VAT refunds. To this decision the Applicant objected to the demand in writing by a letter dated 6th March 2002 and having received no response from the KRA, followed this up with another letter dated 8th April 2002. Following this second letter, the matter was referred to the KRA’s technical committee for a ruling and in July 2002 the technical committee ruled that Local Sales for Export were zero rated provided that there was proof of export. Specifically, the ruling did not restrict proof of export to Remission Certificates. Notwithstanding the Applicant’s position that no proof of export had been required prior to February 1999, it considered the letters obtained from the exporters in 2000 to be sufficient proof. Following the ruling, the KRA reinstated the Applicant’s VAT refunds and continued processing new applications. To the applicant, the implication of this was that KRA accepted the exporter’s letters as proof of export and it accepted that the Applicant had correctly zero rated the Local Export Sales and the Applicant believed this to be the case until December 2004 when this issue was once again raised by the KRA.

12. It was averred that from February 2005, the KRA refused to process the Applicant’s VAT refund applications until it provided further proof in the form of stock records, customs entries and bills of lading, that the tea sold to exporters during the Assessment Period was actually exported. The Applicant reiterated its position that there was no requirement to provide proof of export at the time but nevertheless in order to reach closure on this long outstanding issue, agreed to try and obtain supporting documents from the exporters to demonstrate that the sales were subsequently exported. The Applicant pointed out that this was an onerous requirement and the passage of time would make it difficult to obtain the required proof from the third party exporters. However, the Applicant used its best efforts to obtain the requested documentation from the third party exporters but in May 2005 it was apparent that it would be impossible to obtain the documentation from all except a few of the exporters who had kept these records and who were willing to cooperate with the Applicant. It was then agreed that the Applicant should concentrate its efforts on the four main exporters on a sample basis. Of the sample selected, the Applicant was able to obtain the requested documentation in respect of 59% of the Local Sales for Export. The KRA reviewed the documents obtained and rejected a substantial portion of the documentation on the basis that the documents were not ‘valid tax documents’ notwithstanding that this had not been one of the requirements specifically in relation to stock records which the KRA had previously indicated would be acceptable. In any event, the KRA demanded documentation to support the entire balance of the sample to which the Applicant objected on the basis of impossibility given the duration of time lapsed. The Applicant also suggested that much of the documentation sought by the KRA would be accessible to the KRA from its own records relating to the exporters but the KRA was not willing to seek verification from its own records.

13. Having reached an impasse with the KRA officers handling the matter, the Applicant sought audience with the Respondent in an attempt to finally resolve this issue. The outcome of this meeting was that the KRA requested the Applicant to provide evidence that the exporters in question were registered exporters and the Applicant provided copies of exporter’s licences from the majority of the exporters. Again the KRA rejected these and requested further proof.

14. According to the applicant, the conduct of the Respondent in respect of this matter, with specific reference to the long delays in progressing the matter, the variability in the proof of export demanded at various times over the last six years, the repeated departure from courses of action agreed with the Applicant and the failure to adhere to representations made to the Applicant at various times upon which the Applicant had formed a legitimate expectation, has been capricious and unreasonable and the Applicant is entitled to have the decision quashed and the excess input VAT refunded.

15. It was averred that in December 2006, the Applicant received a notice of assessment dated 21st December 2006 in respect of the Local Sales for Export in respect of which the Applicant had been unable to produce the further proof demanded by the KRA. The Applicant by letter dated 18th January 2007, gave its notice of objection to the said notice of assessment and in its decision dated 8th march, 2007, the Respondent confirmed the assessment in its said decision.

16. It was disclosed that the Applicant then exercised its statutory right to lodge an appeal against the decision to the VAT Tribunal but as the Assessment was time barred by virtue of the fact that the documents that the Applicant was required to produce were time-barred by the VAT Act, the VAT tribunal does not have the jurisdiction to hear the appeal.

17. It was submitted on behalf of the applicant based on the foregoing that it is therefore abundantly clear that prior to the amendment introduced by the Finance Bill, there were no conditions set by the Respondent for purposes of zero rating under the Fifth Schedule of the Act. The circular clearly set out the requirements for issuance of a Remission Certificate to tea exporters one of which was a security bond a sample of which was attached to the circular whose wording specifically referred to the changes and amendments to the Finance Bill 1998. It was therefore submitted that clearly, from the wording of the circular and the wording of the sample/specimen security bond prior to 26th January 1999 zero rating of sales to exporters was not conditional upon production of remission certificates or exemption letters.

18. As to whether the condition/requirement could be applied retrospectively, the applicant submitted that it is a principle of law that unless a contrary intention appears, an enactment is presumed not to be intended to have retrospective intention and relied on Statutory InterpretationbyFrancis Benion (4th Edition) and Samuel K Macharia vs. Kenya Commercial Bank Limited and Others ( Application no. 2 of 2011) at paragraph 61.

19. It is humbly submitted that the conditions that were made by the Respondent for purposes of zero rating sales to exporters and communicated to the Applicant by way of the letter dated 26th January 1999 could not have retrospective effect and therefore the requirement for Remission Certificates and exemption letters could not have been applied retrospectively.

20. As to whether the Respondent acted lawfully in claiming VAT, the applicant relied on Keroche Industries Limited vs. Kenya Revenue Authority & 5 Others (2007) eKLR.

21. It was submitted that the Respondent’s claim is unlawful as the requirement for remission certificates was only communicated to the Applicant on 26th January 1999 and therefore this condition could not be applied retrospectively.

22. It was submitted that prior to 26th January 1999 evidence of export supposed to be provided only by the exporter pursuant to Regulation 10(1) of the VAT Regulations.

23. According to the applicant, Regulation 10(1) of the VAT Act places the onus to produce evidence of export on the licenced exporters to whom the Applicant sold tea. Prior to 26th January 1999, there was no onus whatsoever on the Applicant to maintain any form of evidence of exportation as it was not the exporter.

24. On the authority of R vs. The Commissioner of Domestic Taxes ex parte Barclays Bank of Kenya Limited (Misc Application no.1223 of 2007) the applicant submitted that the clear wording of Regulation 10(1) of the VAT Regulations only required the Third Party Exporters to maintain evidence of export for purposes of zero rating. It was therefore unlawful for the Respondent to demand evidence of exportation from the Applicant as it was not the exporter. Consequently the claim for VAT is equally unlawful.

25. The ex parte applicant also relied on Regulation 7(6) of the VAT Regulations and contended that it only requires a tax payer to keep tax records for a period of 5 years.

26. Therefore even if the Applicant was required to maintain any evidence of exportation, it would only have been required to maintain them for a period of 5 years from the date of entry. In this case the Respondent’s assessment is dated 21st December 2006 and the period of assessment is stated as being 1996 – 1999. It was submitted that pursuant to Regulation 7 (6) of the VAT Regulations, the Respondent could only have based its assessment on records dating back 5 years from the date of assessment. The period 1996 to 1999 is 7 to 10 years before the date of the assessment. Even taking the later date of the period of assessment, that is 1999, the Applicant was only supposed to maintain records for a period of 5 years after 1999 and that period expired in 2004.

27. According to the applicant the Respondent could not have issued an assessment in respect of records which the Applicant was no longer required to maintain by virtue of the clear wording of Regulation 7(6) and the assessment was time barred by virtue of the said provision and therefore unlawful.

28. It was further submitted that by the fourth paragraph of the assessment it was indicated that the commissioner would only consider the applicant’s objection and review its assessment if the objection accompanied by any new evidence. However as Regulation 7(6) did not require the Applicant to maintain records for a period of more than 5 years, it could not have presented any new evidence in support of its objection to an assessment that was raised more than 10 years after the starting date of the period of assessment, that is 1996, and more than 7 years after the closing date of the period of assessment, that is 1999.

29. By raising an assessment after the period specified in Regulation 7 (6) had expired, it was submitted the Respondent denied the Applicant the opportunity to try and procure any new evidence from the Third Party Exporters. The Respondent therefore acted in an unfair and unreasonable manner by denying the Applicant the right to lodge a valid objection.

30. The Respondent states in the Replying Affidavit sworn by Asha Salim on 25th July 2012 that the Respondent issued an unconfirmed assessment on 5th February 2002. However the applicant’s position is that there is no provision in the VAT Act for the issuance of an unconfirmed assessment. Secondly and more importantly the assessment was only sent to the Applicant on 21st December 2006 as stated in the Verifying Affidavit. This fact has not been denied by the Respondent and is in fact supported by the cover letter dated 21st December 2006 which is annexed as annexture AS 2. Therefore the Respondent’s assertion that it issued an unconfirmed assessment on 5th February 2002 is immaterial because the assessment was only sent to the Applicant on 21st December 2006 and the assessment itself states the date confirmed as 20th December 2006 even though there is no such provision in the Act.

31. It was the applicant’s case that the Respondent is mandated to collect tax and therefore had access to all the documents filed by the Third Party Exporters when they exported the tea sold to them by the Applicant. The Respondent acted unfairly and unreasonably in not checking its own records but instead requiring the Applicant to produce documents that were not in the Applicant’s possession or control and that which dated back more than 10 years prior to the date of the assessment. To the applicant, the Respondent acted in an uncertain and unpredictable manner in constantly changing the level of proof required from the Applicant and constantly deviating from agreements reached between the Applicant and Respondent as to the level of proof required. In support of this submission the applicant relied on Rvs. Registrar of Societies Exparte Waswa and 2 Others [Misc Appl. No.769 0f 2004]. It also relied on Ecobank Kenya Limited vs. the Commissioner of Domestic Taxes (Income Tax Appeal No.8 of 2010).

32. As demonstrated in the paragraphs above, between the time that the Applicant sent its response to the letter dated 20th December 2000 and until 4th March 2002, the Respondent did not respond to the letter and continued to process the Applicant’s VAT refunds leading the Applicant to believe that it was satisfied with the level of proof provided by the exporters. That it again refused to process the Applicant’s VAT refunds in March 2002 however after the KRA’s technical committee delivered its ruling in July 2002, the Respondent again began to process the VAT refunds and it went on processing the same for a period 3 years . By not responding to the Applicant’s letters and by continuing to process the Applicant’s VAT refunds, the Respondent represented to the Applicant that it was satisfied with the level of proof provided by the Applicant and created a legitimate expectation that the proof provided by the Applicant was sufficient and it would continue to process the Applicant’s VAT refunds.

33. Based on the foregoing it was submitted that it is clear that a legitimate expectation arose from the Respondent’s conduct in continuing to process the Applicant’s VAT refunds and by its conduct in not having demanded proof of export even prior to 1996.

34. It was further submitted that the Respondent acted in acted in an unfair and unreasonable manner in issuing an assessment more than 7 years after an audit and levying interest and penalties on the principal amount despite the fact that the delay was occasioned by the Respondent and the onus was upon the Respondent to issue the assessment expeditiously.

35. As to whether the Respondent was entitled to withhold the Applicant’s VAT refunds, the applicant relied onMbs HC Misc Appl. No.82 of 2010, Republic and Kenya Revenue Authority ex-parte L.A.B. International Kenya Limited where it was held that:

“The common law, in its evolution, has defined the rules of conduct for a public authority taking a public decision, entrusting the overall control-jurisdiction in the hands of the Courts of law, but for Kenya, such a general competence of the Courts is now no longer confined to the terms of statute law and subsidiary legislation, but has a fresh underwriting in the Constitution of Kenya, 2010, Article 47, which imposes a duty of fair administrative action, and [Art.10(2) (c) demands “good governance, integrity, transparency and accountability

From the facts of the instant case, it is clear to this Court that the Respondent failed to deal with the applicant’s claim of VAT refund in the context of fairness, transparency, accountability or good governance.

36. It was submitted that the Judge thereafter issued an Order of Mandamus to compel the Respondent to process the VAT refunds.

37. The ex parte applicant therefore prayed that the assessment dated 8th March 2007 be quashed and an order of Mandamus be granted to compel the Respondent to process the Applicant’s VAT refunds.

Respondent’s Case

38. The Respondent on its part opposed the application.

39. According to the Respondent, in November 1999, it started an examination of the books and records of the applicant (VAT Audit) for the period January 1996 to September 1999 at the Applicant’s Kericho Office. According to the Respondent, it found out that the applicant zero rated sales to persons it deemed as “exporters”pursuant to Regulation 10 of the VAT Regulations, 1994 and the Fifth schedule to the VAT Act (“local tea sales for export” wherein the buyers/exported purchased tea from UTKL with the intention to later blend or repack it for export). The in his letter dated 20/12/2000 wrote to the appellant outlining the outcome of the VAT audit and clarified that sales that were made by the applicant and classified as “local sales for export” sold to other companies with the intention to later export was not automatically zero rated; hence it would refrain from taxing them only if proof of exportation was provide. The respondent sought to rectify this anomaly by issuing unconfirmed assessment no. 1420020000010 on 5/2/2002 so as to establish the liability especially interest thereon at that time.

40. According to the Respondent, it demanded tax on VAT arrears on “local tea sales for export”through his letter dated 4th March, 2002 which also drew the appellants attention to the tax position if the issue remain unresolved hence a valid assessment. This letter was based on the assessment of 5th February, 2002. The applicant in his letter dated 6th March, 2002 sought to clarify that it did not charge VAT on “local sales for export” as they were zero rated under paragraph 6 of part A of the Fifth Schedule to the VAT Act under the category “the supply of goods and taxable services to exporters under conditions prescribed by the commissioner”. In the same letter the applicant also stated that it should not be charged VAT on “local tea sales for export” for the periods to 1999 on the grounds that:

a. They were following “industry practice” and started charging VAT on local sales for export in 1998 after the passing of the Finance Bill and

b. That they believed/trusted that their clients exported the tea sold to them as 95% of Kenyan tea is exported.

41. It was averred that the applicant’s consultants wrote to the respondent on 8th April, 2002 objecting to the letter dated 4th March, 2002 on the same grounds as those advanced by the applicant. To this the Respondent reiterated that if the applicant provided proof that the “local sales for export” were actually exported it would refrain from taxing those particular sales. This is the position that the respondent has taken in its letters of 3rd October 2001 and 5th August 1998.

42. It was deposed that the applicant agreed to provide proof of exports but asked for time stating that some of the documents relating to the 3rd Part exports were kept at their Mombasa offices while some were kept by their clients. Accordingly, the applicant agreed to facilitate a visit to their Mombasa office to verify exports documents they claimed could be availed by some of their clients. It took a very long time for the applicant to organize the Mombasa visit and to request their clients to provide evidence of exportation. However though the applicant’s Mombasa office was visited in March 2006 no such documents were availed. It was therefore contended that the respondent took its time to arrange for a visit to their Mombasa office to verify exemption letters and export documents which were to support the zero rating of sales to the 3rd Parties and hence the alleged delay and misconduct on the part of KRA does not arise. It was further averred that the applicant’s clients also wrote to respondent stating that they had duly exported the tea purchased locally from the applicant but never availed evidence to back up the same.

43. It was therefore the Respondent’s case that in the absence of satisfactory proof of such exportation and after lengthy discussion, the respondent treated the “local tea sales to exporters” as local and the assessment No. 1420020000010 was confirmed on 21st December, 2006.

44. In the Respondent’s view, Part A of the Fifth Schedule to the VAT Act lists the various supplies of goods and taxable services which are zero rated subject to the satisfaction of the Commissioner i.e. the commissioner will require the production of certain facts, information and documents from a registered person before the said supplies are zero rated in accordance with section 8 of the VAT Act. Since paragraph 6 of Part A of the Fifth Schedule states that the supply of good and taxable services to exporters under conditions prescribed by the commissioner shall be zero rated effectively means that the commissioner has to be satisfied by provision of documents, facts or information as proof of exportation for such supplies to be zero rated. It added that Regulation 10 of the Value Added Tax Regulations of the VAT Act stipulated certain documents which must be produced by a registered person who exports taxable goods or services, in order to zero rate such supplies of goods and taxable services and the production of the stipulated documents will be proof that the goods and services have been exported. The requirement imposed by regulation 10 is necessary as goods meant for export are usually diverted into the local market. In the alternative, the respondent stated that the prescription of conditions and conformity with such conditions was a condition precedent to the enjoyment of the zero rating to exporters under paragraph 6 of the Fifth Schedule to the VAT Act.

45. According to the Respondent, supplies under the “local sales for export” occur when the buyer from the applicant blends and repacks the tea for export. They are therefore 3rd party exports and the buyer must either;

a. Avail exemption letters from the commissioner of VAT allowing them to buy tax free from UTKL or;

b. The seller must charge them VAT which is subsequently claimed as a refund or input tax from the VAT Department on producing proof of exportation of the same.

46. It was averred that since communication by the East African Tea Trade Association (EATTA) dated 26th January, 1999 to the same requirements on private tea sales was sent to all the tea exporters, the applicant was aware of the VAT requirements.

47. According to the Respondent, it is not guided by industry practice but by the law which should be applied uniformly to all those involved in a tax regime affected by the remissions arising from exports. In its view, the legal requirements of five years refers to the period within which documents are requested for on fresh audits. At the time the trader was visited the department was well within the time limit and the documents required were to support issues that came up after the audit. This was communicated to the applicant through the respondent’s letter dated 8th March, 2007.

Determinations

48. I have considered the issues raised in this application by way of affidavits, Statement of Facts, grounds and submissions by the respective parties.

49. The principles guiding tax practice, legislation and enforcement were restated in Republicvs. Commissioner of Domestic Taxes Large Tax Payer’s Office Ex-Parte Barclays Bank of Kenya LTD [2012] eKLR where Majanja, J held:

“The approach to this case is that stated in the oft cited case of Cape Brandy Syndicate v Inland Revenue Commissioners[1920] 1 KB 64 as applied in T.M. Bell v Commissioner of Income Tax[1960] EALR 224 where Roland J. stated, “ …in a taxing Act, one has to look at what is clearly said. There is no room for intendment as to a tax. Nothing is to be read in, nothing it to be implied. One can only look fairly at the language used… If a person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.”As this case concerns the interpretation of the Income Tax Act, I am also guided by the dictum of Lord Simonds in Russell v Scott[1948] 2 ALL ER 5 where he stated, “My Lords, there is a maxim of income tax law which, though it may sometimes be overstressed yet ought not to be forgotten. It is that the subject is not to be taxed unless the words of the taxing statute unambiguously impose the tax upon him”adopted in Stanbic Bank Kenya Limited v Kenya Revenue AuthorityCA Civil Appeal No. 77 of 2008 (Unreported) [2009] eKLR per Nyamu JA (See also Jafferali Alibhai v Commissioner of Income Tax[1961] EA 610, Kanjee Naranjee v Income Tax Commissioner[1964] EA 257). Any tax imposed on a subject is dictated by the terms of legislation and taxing authority must satisfy itself that the transaction fits within the definition of the statute. In Adamson v Attorney General(1933) AC 257 at p 275 it was held that, “The section is one that imposes a tax upon the subject, and it is well settled that in such cases it is incumbent on the Crown to establish that its claim comes within the very words used, and if there is any doubt or ambiguity this defect-if it be in view of the Crown a defect can only be remedied by legislation.”

50. In Tanganyika Mine Workers Union vs. The Registrar of Trade Unions [1961] EA 629, it was held that where the provisions of an enactment are penal provisions, they must be construed strictly and that in such circumstances you ought not to do violence to its language in order to bring people within it, but ought rather to take care that no-one is brought within it who is not brought within it in express language. SeeLondon County Council vs. Aylesbury Dairy Company Ltd [1899] 1 QB 106 at 109; Muini vs. R through Medical Officer of Health, Kiambu [2006] 1 KLR (E&L) 15; Hardial Singh and Others [1979] KLR 18; [1976-80] 1 KLR 1090.

51. Similarly, it was held in Vestey vs. Inland Revenue Commissioners [1979] 3 All ER at 984 that:

“Taxes are imposed on subjects by parliament. A citizen cannot be taxed unless he is designated in clear terms by a taxing Act as a taxpayer and the amount of his liability is clearly defined.”

52. In the same vein, it was held in Russell (Inspector of Taxes) vs. Scott [1943] AC 422 at 433:

“I must add that the language of the rule is so obscure and so difficult to expound with confidence that – without seeking to apply any different principle of construction to a Revenue Act than would be proper in the case of legislation of a different kind I feel that the tax payer is entitled to demand that his liability to a higher charge should be made out with reasonable clearness before he is adversely affected...my Lords, there is a maxim of income tax law, which though it may sometimes be overstressed yet ought not to be forgotten. It is that the subject is not to be taxed unless the words of the taxing statute unambiguously impose tax upon him. It is necessary that this maxim should on occasion be reasserted and this is such an occasion.”

53. In Unilever Kenya Limited vs. The Commissioner of Income Tax Nairobi High Court Income Tax Appeal No. 753 of 2003, in which the holdings in Scott vs. Russell [1948] 2 All ER 1 and Kanjee Nazanjee vs. Income Tax Commissioner [1964] EA 257 were cited with approval, it was held that where the language used in the legislation is somehow obscure, the taxpayer is entitled to demand that his liability to a higher charge should be made out with reasonable clarity before he is adversely affected. In Commissioner of Income Tax vs. Westmont Power (K) Ltd Nairobi High Court Income Tax Appeal No. 626 of 2002,the Court while citing Inland Revenue vs. Scottish Central Electricity Company [1931] 15 TC 761 expressed itself as follows:

“Even though taxation is acceptable and even essential in democratic societies, taxation laws that have the effect of depriving citizens of their property by imposing pecuniary burdens resulting also in penal consequences must be interpreted with great caution. In this respect, it is paramount that their provisions must be express and clear so as to leave no room for ambiguity…any ambiguity in such a law must be resolved in favour of the taxpayer and not the Public Revenue Authorities which are responsible for their implementation.”

54. In tax cases therefore the Court is not entitled to attempt a discovery at the intention of the Legislature but must restrict itself to the clear words of the statute.

55. The same reasoning was adopted by Nyamu, J (as he then was), in Keroche Industries Limited vs. Kenya Revenue Authority & 5 Others [2007] 2 KLR 240 where he expressed himself as follows:

“taxation can only be done on clear words and cannot be on intendment. Linked to this is that a penalty must be imposed in clear words. Finally even where the inclination of the legislature is not clear or where there are two or more possible meanings, the inclination of the court should be against a construction or interpretation which imposes a burden, tax or duty on the subject...Nothing summarises the above position better than Brooms Legal Maxims: ‘a remedial statute therefore shall be construed so as to include cases which are within the mischief which the statute was intended to remedy; whilst, on the other hand, where the intention of the Legislature is doubtful, the inclination of the court will always be against that construction which imposes a burden, tax or duty or the subject. It has been designated as “a great rule” in the construction of fiscal law, “that they are not to be extended by any laboured construction, but that you must adhere to the strict rule of interpretation; and if a person who is subjected to a duty in a particular character or answers that description, the duty no longer attaches upon him and cannot be levied. A penalty moreover must be imposed by clear words. The words of a statute shall be restrained for the benefit of him against whom the penalty is inflicted, and the language of the statute must be strictly looked at in order to see whether the person against whom the penalty is sought to be enforced has committed an offence to do with it.’…The principle remarked Lord Abinger “adopted by Lord Tenterden, that a penal law ought to be construed strictly is not only a sound one, but the only one consistent with our free institutions. The interpretation of statutes has always in modern times been highly favourable to the personal liberty of the subject and I hope will always remain so. This Court of course does appreciate the point made by the respondents’ Counsel that if the meaning of the provisions of the relevant empowering taxation laws is clear the court has no business intervening. This principle is based on the high authority ofBennun on Statutory Interpretationat page 726, 727 as follows:- ...If the meaning of the provision is reasonably clear, the courts have no jurisdiction to mitigate such harshness. It is of course regarded as penal for a person to be taxed twice over in respect of the same matter.” The significance of this quotation is that although the applicant did file monthly returns and keep daily production records, and the stockbook as required the tax imposed by the subsequent formula based on input and output purports to tax the company twice. This is also reflected in the inconsistent figures reflected by the three major audits. The taxman had come up with inconsistent figures for the same period due to its lapse in adhering to the law especially s 137 of the Act. I find that they cannot tax the applicant twice overBennionadds:- ‘Nevertheless taxation is clearly “penal” within this section of the Code, and must not be enforced by the courts unless clearly imposed. As Evans LJ said in the context of tax legislation it is necessary to consider the legal analysis with the utmost precision so that the taxpayer shall not become liable to tax unless this is clearly and unequivocally the object of the statutory provisions...The Courts are reluctant to adopt a construction permitting a person’s tax liability to be fixed by administrative discretion.’…This is how this court has regarded the assessment of tax on an arbitrary input-output formulae because it is not supported by any law nor is its retroactivity permitted by law…The same principles as above, were accepted and applied in the case ofCape Brandy Syndicate vs. Inland Revenue Commissioners[1921] KB 64where Ronlat J, restated the principle in these words: ‘in a taxing Act clear words are necessary in order to tax the subject. Too wide and fanciful a construction is often to be given to that maxim, which does not mean that words are to be unduly restricted against the Crown or that there is to be any discrimination against the crown in those Acts. It simply means that in a taxing Act one has to look merely at what is clearly said. There is no reason for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing to be implied. One can only look fairly on the language used.’… Again, in the case ofRamsay Ltd vs. Inland Revenue Commissioner[1992] AC 300the same principles were expressed as follows:- ‘A subject is only to be taxed on clear words not upon intendment, or upon the “equity” of an Act’. Any taxing Act of Parliament as to be construed in accordance with this principle. What are “clear words” is to be ascertained upon normal principles; these do not confine the courts to literal interpretation. There may, indeed should, be considered the context and scheme of the relevant Act as a whole and its purpose may, indeed should be regarded ...” ........ A subject is entitled to arrange his affairs so as to reduce his liability to tax. The fact that the motive for a transaction may be to avoid tax does not invalidate it unless a particular enactment so provides. It must be considered according to its legal effect.”

56. Therefore, whereas the Court appreciates the need to collect taxes, in carrying out their statutory obligations the tax authorities must adhere to the law. As was held in Keroche Industries Limited vs. Kenya Revenue Authority & 5 Others (supra):

“It is no good answer for the taxman to proclaim that Kshs 1 billion (appx) is intended to swell the public treasury because due to the application of the above principles that money is not lawfully due…Applying the same reasoning, to the matter before this court, it does not matter that the respondents say and think they are owed over a billion Kenya shillings - what matters is whether the amount is lawfully due and whether the law allows its recovery? It is not a question of impression or perception of what is owed, instead it is what if anything, is owed under the relevant law and whether its assessment and recovery is permitted by the applicable law. If rightly due, the huge amount notwithstanding the court must uphold the right of recovery regardless of its consequence to the applicant and if not due under the law it must not hesitate to disallow it and must disallow it to among other things to uphold both the law the integrity of the rule of law.”

57. This position is reflected in Inland Revenue Commissioners vs. Wolfson [1949] 1 All ER 864 at 868 where it was held that:

“It was argued that the construction that I favour leaves an easy loophole through which the evasive tax payer may find escape. That may be so, but I will repeat what has been said before. It is not the function of a court of law to give words a strained and unnatural meaning because only thus will a taxing section apply to a transaction which had the legislature thought of it, would have been covered by appropriate words. It is the duty of the Court to give to the words of this subsection their reasonable meaning, and I must decline on any ground of policy to give them a meaning which with all respect to the dissentient Lord Justice I regard as little short of extravagance.”

58. In this case it is contended that prior to February 1999, no conditions had been prescribed by the Respondent under Item 6 of Part A of the Fifth Schedule of the VAT Act (Cap 476). In particular, there was no requirement either under the applicable legislation or arising from any communication by the Respondent that tea producers should request or retain any form of proof of export in order for sales to exporters to be zero rated under Item 6 of the Fifth Schedule to the Act. Accordingly, in keeping with the industry practice, no form of proof of export was requested or retained and the Respondent processed and paid VAT refunds of excess input VAT arising from zero rated sales including Local Sales for Export without any requirement for additional or supporting documentation to be provided by the Applicant in respect of those sales. It was not until August 1998, following changes introduced by Finance Bill 1998, that a clarification was provided in respect of sales made to the tea auction centres and the Kenya Revenue Authority (hereinafter referred to as “KRA”) issued notices to the effect that auction sales to exporters would only be zero rated if the tea purchased was actually exported. This led to discussions with EATTA culminating in an agreement between the KRA and the EATTA that all sales to exporters, whether through the auction or otherwise, would only be zero rated on the basis of Remission Certificates which the KRA would issue to exporters who had satisfied the requirements including the requirement to execute a security bond in respect of the consignment in question as per the seller’s pro forma invoice. This was communicated to all members of the EATTA by an EATTA circular dated 26th January 1999. Accordingly, from February 1999 the Applicant only treated Local Sales for Export as zero rated where the exporter produced a valid Remission Certificate or exemption letter failing which VAT would be charged at the applicable rate.

59. That prior to 1999 the above practice was the one prevailing has not been seriously controverted by the Respondent. The Respondent’s contention is that it is not guided by industry practice but by the law which should be applied uniformly to all those involved in a tax regime affected by the remissions arising from exports. However from the totality of the evidence adduced in this matter it is clear that notwithstanding the Respondent’s position that the law be applied uniformly the Respondent on several occasions conducted itself in a manner suggesting that the position adopted by the applicant was acceptable to the Respondent.

60. I associate myself with the position adopted in Ecobank Kenya Limited vs. the Commissioner of Domestic Taxes (Income Tax Appeal No.8 of 2010),that:

“In an environment of business, that certainty and predictability is so crucial that to deny the same amounts to a denial of an economic right. Now, when such haphazard regulation affects a citizen’s income the effect will be felt well beyond the comfort or discomfort of the two parties before the court. It is an issue which a court of law must tread on carefully, and where possible, restore the rights of the appellant and to reduce, as far as possible, the cascading negative impacts on all the parties associated with that income.”

61. This was the position in Republic vs. Attorney General & Another Ex Parte Waswa & 2 Others [2005] 1 KLR 280 where it was held that:

“The principle of a legitimate expectation…is a principle, which should not be restricted because it has its roots in what is gradually becoming a universal but fundamental principle of law namely the rule of law with its offshoot principle of legal certainty. If the reason for the principle is for the challenged bodies or decision makers to demonstrate regularity, predictability and certainty in their dealings, this is, in turn enables the affected parties to plan their affairs, lives and businesses with some measure of regularity, predictability, certainty and confidence. The principle has been very ably defined in public law in the last century but it is clear that it has its cousins in private law of honouring trusts and confidences. It is a principle, which has its origins in nearly every continent. Trusts and confidences must be honoured in public law and therefore the situations where the expectations shall be recognised and protected must of necessity defy restrictions in the years ahead. The strengths and weaknesses of the expectations must remain a central role for the public law courts to weigh and determine.”

62. In business transactions this principles cannot be overemphasised. As was appreciated in Republic vs. The Minister for Lands & Settlement & Others Mombasa HCMCA No. 1091 of 2006, the business world transacts billions of shillings hence public policy demands those who are involved in such transactions have some measure or certainty and predictability in the manner in which they conduct their affairs. It is important that they know where they stand with respect to their investments and liabilities so that they can order their activities in a certain direction. The financial public in particular requires decisiveness and finality in such decisions and they should not be left to harbour apprehension that the steps they take today may be reversed and their investments or expenditure wasted by reason of belated actions taken by those in authority after the lapse of time lulled them into a false sense of security that no such adverse action would be taken. To my mind the economy with the current volatile financial markets cannot afford to have such uncertainty.

63. I agree with the position in Ecobank Kenya Limited vs. The Commissioner of Domestic Taxes (supra) that:

“..business people have a right of certainty and predictability in the applicability of conduct, rules, policies and procedures which underlie the proper regulation of economic activities. This right necessarily militates against policies, regulations and procedures which are haphazardly restored to by public regulatory bodies without adequate notice to those whose conduct or behavior is to be regulated.”

64. This is the sense in which I understand Nyamu, J’s position (as he then was) in Keroche Industries Limited vs. Kenya Revenue Authority & 5 Others Nairobi HCMA No. 743 of 2006 [2007] KLR 240:

“In this case imposing a liability of 1 billion on the applicant to be paid within 14 days though attractive in terms of enhanced public revenue and perhaps for the zeal of meeting annual tax targets, I find is not such an overriding interest for the reasons set out in this judgment including failure to satisfy the principle of legality. In order to ascertain whether or not the respondents decision and the intended action is an abuse of power the court has taken a fairly broad view of the major factors such as the abruptness, arbitrariness, oppressiveness and the quantumof the amount of tax imposed retrospectively and its potential to irretrievably ruin the applicant. All these are traits of abuse of power..Statutory power must be exercised fairly…The applicant in conducting its affairs is entitled to rely on certainty and regularity of law. The capriciousness, oppression and arbitrary application of the tariff retroactively is the antithesis of certainty and regularity of law…One of the ingredients of the rule of law is certainty of law. Surely the most focused deprivations of individual interest in life, liberty or property must be accompanied by sufficient procedural safeguards that ensure certainty and regularity of law. This is a vision and a value recognized by our Constitution and it is an important pillar of the rule of law. No one including a zealous taxman should be allowed to violate these principles.”

65. The Court further held that:

“…….legitimate expectation is based not only on ensuring that legitimate expectations by the parties are not thwarted, but on a higher public interest beneficial to all including the respondents, which is, the value or the need of holding authorities to promises and practices they have made and acted on and by so doing upholding responsible public administration. This in turn enables people affected to plan their lives with a sense of certainty, trust, reasonableness and reasonable expectation. An abrupt change as was intended in this case, targeted at a particular company or industry is certainly abuse of power. Stated simply legitimate expectation arises for example where a member of the public as a result of a promise or other conduct expects that he will be treated in one way and the public body wishes to treat him or her in a different way... Public authorities must be held to their practices and promises by the courts and the only exception is where a public authority has a sufficient overriding interest to justify a departure from what has been previously promised. In this case imposing a liability of 1 billion on the applicant to be paid within 14 days though attractive in terms of enhanced public revenue and perhaps for the zeal of meeting annual tax targets, I find is not such an overriding interest for the reasons set out in this judgment including failure to satisfy the principle of legality. In order to ascertain whether or not the respondents decision and the intended action is an abuse of power the court has taken a fairly broad view of the major factors such as the abruptness, arbitrariness, oppressiveness and the quantumof the amount of tax imposed retrospectively and its potential to irretrievably ruin the applicant. All these are traits of abuse of power. Thus I hold that the frustration of the applicants’ legitimate expectation based on the application of tariff amounts to abuse of power…Statutory power must be exercised fairly.”

66. This Court appreciates the position in Republic vs. Kenya Revenue Authority ex parte Shake Distributors Limited Hcmisc. Civil Application No. 359 of 2012 that:

“…the cornerstone of legitimate expectation is a promise made to a party by a public body that it will act or not act in a particular manner. For the promise to hold, the same must be made within the confines of the law. A public body cannot make a promise which goes against the express letter of the law.”

67. According to De Smith, Woolf & Jowell,“Judicial Review of Administrative Action” 6thEdn. Sweet & Maxwell page 609:

“A legitimate expectation arises where a person responsible for taking a decision has induced in someone a reasonable expectation that he will receive or retain a benefit of 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 government’s dealings with the public.”

68. However it was held in South Bucks District Council vs. Flanagan [2002] EWCA Civ. 690 [2002] WLR 2601 at [18] that:

“Legitimate expectation involves notions of fairness and unless the person making the representation has actual or ostensible authority to speak on behalf of the public body, there is no reason why the recipient of the representation should be allowed to hold the public body to the terms of the representation. He might subjectively have acquired the expectation, but it would not be a legitimate one, that is to say it would not be one to which he was entitled.”

See also Rowland vs. Environment Agency [2002] EWHC 2785 (Ch); [2003] ch 581 at [68]; CA [2003] EWCA Civ 1885; [2005] Ch 1 at [67].

69. It is my view that the exercise of statutory power must be so undertaken in a manner that is fair and just to the people against whom the same is being exercised. As was held in Keroche Industries Limited vs. Kenya Revenue Authority & 5 Others(supra) while citing Reg vs. Secretary of State for the Environment Ex Parte NottinghamShire Country Council[1986] AC:

“A power which is abused should be treated as a power which has not been lawfully exercised…Thus the courts role cannot be put in a straight jacket. The courts task is not to interfere or impede executive activity or interfere with policy concerns, but to reconcile and keep in balance, in the interest of fairness, the public authorities need to initiate or respond to change with the legitimate interests or expectation of citizens or strangers who have relied, and have been justified in relying on a current policy or an extant promise. As held inex parte Unilever Plc(supra) the Court is there to ensure that the power to make and alter policy is not abused by unfairly frustrating legitimate individual expectations...The change of policy on such an issue must pass a much higher test than that of rationality from the standpoint of the public body...A public authority must not be allowed by the court to get away with illogical, immoral or an act with conspicuous unfairness as has happened in this matter, and in so acting abuse its powers. In this connection Lord Scarman put the need for the courts intervention beyond doubt in theex-parte Prestonwhere he stated the principle of intervention in these terms: “I must make clear my view that the principle of fairness has an important place in the law of judicial review: and that in an appropriate case, it is a ground upon which the court can intervene to quash a decision made by a public officer or authority in purported exercise of a power conferred by law.” The same principle was affirmed by the same Judge in the House of Lords inReg vs. Inland Revenue Commissioners, ex-parte National Federation of Self Employed and Small Business Ltd[1982] AC 617that a claim for judicial review may arise where the Commissioners have failed to discharge their statutory duty to an individual or have abused their powers or acted outside them and also that unfairness in the purported exercise of a power can be such that it is an abuse or excess of power. In other words it is unimportant whether the unfairness is analytically within or beyond the power conferred by law: on either view, judicial review must reach it. Lord Templeman reached the same decision in the same case in those helpful words: “Judicial review is available where a decision making authority exceeds its powers, commits an error of law commits a breach of natural justice reaches a decision which no reasonable tribunal could have reached or abuses its powers.” Abuse of power includes the use of power for a collateral purpose, as set out inex-parte Preston,reneging without adequate justification on an otherwise lawful decision, on a lawful promise or practice adopted towards a limited number of individuals. I further find as in the case ofR (Bibi) vs. Newham London Borough Council[2001] EWCA 607, [2002] WLR 237, that failure to consider a legitimate expectation is a failure to consider a relevant consideration and this would in turn call for the courts intervention in assuming jurisdiction and giving the necessary relief.”

70. As was held in Republic vs. Commissioner of Co-operatives ex-parte Kirinyaga Tea Growers Co-operative Savings and Credit Society Ltd [1999] 1 EA 245 (CAK) at page 249, statutory powers can only be exercised validly if they are exercised reasonably, rationally and properly and no statute ever allows any public officer to exercise statutory power arbitrarily or capriciously. It similarly held in Republic vs. Kenya Revenue Authority ex parte Aberdare Freight Services Limited[2004] eKLR at page 20 that it is now an accepted principle in this field of law that statutory powers and duty must be exercised and performed reasonably.

71. Public authorities must therefore exercise their power diligently, fairly and prudently. This was the position in Doody vs. The Home Secretary of State [1993] 1 All ER 151 where it was held that:

“Where an Act of Parliament confers administrative power there is a presumption that it will be exercised in a manner which is fair.”

72. The exercise of public power whether permitted or otherwise in a manner that frustrates the purpose for which the power is granted amounts to abuse of the same. This was the position adopted in Republic vs. Commissioner of Customs Exparte Mulchand Ramji & Sons Limited [2010] eKLR in which it was held that:

“A power may be abused in various ways for example when one acts beyond the limits of power, or acts irrationally or acts for an improper purpose or seeks to frustrate the legitimate expectation of another. A public body or officer is expected to act fairly in decision making, so that if he dies not, then he is deemed to abuse his powers….In the instant case, I have found above that there seems to be no legal or factual basis upon which the Respondent decided and classified the goods…and therefore abused its powers and unfairly exercised its discretion”

73. Abuse of power is one of the grounds upon which a taxing authority’s powers can be challenged and this was appreciated in Re Preston[1985] 1 A.C. 835, page 836 paragraphs B and C where it was held that:

“a taxpayer could challenge a decision taken by the commissioners in exercising their statutory powers and duties if he could show that they had failed to discharge their statutory duty towards him or that they had abused their powers...”

74. The duty to act fairly, on the other hand was emphasised in by Scarman L.J. in H.T.V. Ltd vs. Price Commission[1976] I.C.R. 170 at page 189, which was cited by Lord Templemann in Re Preston (supra) at page 866 paragraph A and B where the Judge expressed himself as follows:

“Agencies such as the Price Commission must act fairly. If they do not, the High Court may intervene either by prerogative order to prohibit, quash or direct a determination as may be appropriate, or, as sought in this case, by declaring the meaning of the statute and the duty of the agency...It is a commonplace of modern law that such bodies must act fairly...It is not really surprising that a code must be implemented fairly, and that the courts have power to redress unfairness.”

75. In this case, the Respondent by its conduct induced in the ex parte applicant a sense of security that it was satisfied with the applicant’s explanation for its inability to secure the required documents. It did this by not immediately disputing the ex parte applicant’s explanation and the subsequent payment of refunds. Whereas legitimate expectation does not derogate from the express provisions of the law, when it comes to the consideration of legitimate expectation, it is the effect of the conduct of the authority concerned that comes into focus. Where the inability by the taxing authority to discover the actual taxes payable was as a result of concealment by the tax payer, the tax payer cannot hide behind legitimate expectation to escape the payment of taxes. I accordingly associate myself with the position adopted by Lenaola, J (as he then was) in Pharmaceutical Manufacturing (K) Co. Ltd and 3 Others vs. The Commissioner General of the Kenya Revenue Authority and 2 Others High Court Petition Number 589 of 2013 that:

“...the 1st Petitioner cannot therefore devise methods of avoiding tax and then claim that it had been exempted of the same.”

76. However, where the taxing authority goes to sleep and as a result lulls the taxpayer into a false sense of security that the taxes in question would not be demanded or pursued, as a result of which the tax payer loses recourse which would have been legally available to it had the tax been demanded promptly, it may well be unfair and unjust for the demand to be sustained.

77. In this case, Regulation 7(6) of the VAT Regulations provides that:

“All records shall be kept in the Kiswahili or English language and shall be kept for a period of five years from the date of the last entry made therein.”

78. It is clear that a tax payer is not obliged to keep records relating thereto for more than 5 years. In my view there is a good reason for this. It is not that after 5 year the tax payer is likely to run out of storage facilities. To my mind the law appreciates that due to financial volatility in business transactions there ought to be a cut-off point so that business people ought to rest assured that after a certain period of time they will not be unduly harassed hence are at liberty to dispose of their records. To suddenly demand records from taxpayers when the law expressly gives them the liberty to dispose of the same is clearly unreasonable.

79. I must however emphasise that where the delay in exercising statutory power has led to injustice which would otherwise have been avoided and no explanation is forthcoming for such inaction the law must step is to ameliorate the injury. In my view this was the genesis of the principle of legitimate expectation. In the circumstances of this case, the respondent’s actions and inactions legitimately created an expectation on the part of the applicant that the taxes were not payable as was held by Nyamu, J in Akaba Investments Limited vs. Kenya Revenue Authority [2007] eKLR, that 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.

80. In this case however the applicant contends that the law prior to 26th January 1999 was that the evidence of export was supposed to be provided only by the exporter pursuant to Regulation 10(1) of the VAT Regulations. The said Regulation provides that:

“ Subject to section 8 of the Act and the Fifth Schedule to the Act, any taxable goods or services exported by a registered person shall be zero rated if evidence consisting of......is maintained on the file by the registered person for examination by an authorised officer on demand.”

81. I agree with the applicant that Regulation 10(1) of the said Regulations places the onus to produce evidence of export on the licenced exporters to whom the Applicant sold tea. In this case it is further contended which contention has not been controverted that prior to 26th January 1999, there was no onus whatsoever on the Applicant to maintain any form of evidence of exportation as it was not the exporter. Therefore to demand that the applicant produces records which the law did not oblige it to have in the first place is clearly unreasonable and irrational.

82. To impose a condition that did not exist previously retrospectively was clearly unreasonable. This practice was deprecated in Keroche Industries Limited vs. Kenya Revenue Authority & 5 Others(supra) when it was held that:

“imposing a liability of 1 billion on the applicant to be paid within 14 days though attractive in terms of enhanced public revenue and perhaps for the zeal of meeting annual tax targets, I find is not such an overriding interest for the reasons set out in this judgment including failure to satisfy the principle of legality. In order to ascertain whether or not the respondents decision and the intended action is an abuse of power the court has taken a fairly broad view of the major factors such as the abruptness, arbitrariness, oppressiveness and the quantumof the amount of tax imposed retrospectively and its potential to irretrievably ruin the applicant. All these are traits of abuse of power.”

83. The principle of unreasonableness was projected in Associated Provincial Picture Houses vs. Wednesbury Corporation[1948] 1 KB 223where it was held:

“It is true the discretion must be exercised reasonably. Now what does that mean? Lawyers familiar with the phraseology commonly used in relation to exercise of statutory discretions often use the word "unreasonable" in a rather comprehensive sense. It has frequently been used and is frequently used as a general description of the things that must not be done. For instance, a person entrusted with discretion must, so to speak, direct himself properly in law. He must call his own attention to the matters which he is bound to consider. He must exclude from his consideration matters which are irrelevant to what he has to consider. If he does not obey those rules, he may truly be said, and often is said, to be acting "unreasonably." Similarly, there may be something so absurd that no sensible person could ever dream that it lay within the powers of the authority. Warrington LJ inShort vs. Poole Corporation[1926] Ch. 66, 90, 91 gave the example of the red-haired teacher, dismissed because she had red hair. That is unreasonable in one sense. In another sense it is taking into consideration extraneous matters. It is so unreasonable that it might almost be described as being done in bad faith; and, in fact, all these things run into one another.”

84. Therefore if the authority empowered to exercise statutory power does so in bad faith, its decision would amount to irrationality. This must be so due to the rationale propounded by Prof Sir William Wadein his workAdministrative Law that:

“The powers of public authorities are…essentially different from those of private persons. A man making his will, may subject to any right of his dependants dispose of his property just as he may wish. He may act out of malice or a spirit of revenge, but in law, this does not affect his exercise of his power. In the same way a private person has an absolute power to allow whom he likes to use his land…regardless of his motives. This is unfettered discretion. But a public authority may do none of these things unless it acts reasonably and in good faith and upon lawful and relevant grounds of public interest. The whole conception of unfettered discretion, is inappropriate to a public authority which possesses powers solely in order that it may use them for the public good. But for public bodies the rule is opposite and so of another character altogether. It is that any action to be taken must be justified by positive law. A public body has no heritage of legal rights which it enjoys for its own sake, at every turn, all of its dealings constitute the fulfilment of duties which it owes to others; indeed, it exists for no other purpose…But in every such instance and no doubt many others where a public body asserts claims or defences in court, it does so, if it acts in good faith, only to vindicate the better performances of the duties for whose merit it exists. It is in this sense that it has no rights of its own, no axe to grind beyond its public responsibility; a responsibility which define its purpose and justifies its existence, under our law, that is true of every public body. The rule is necessary in order to protect the people from arbitrary interference by those set in power over them…”

85. Therefore if a public authority delays in the exercise of its statutory power without justifiable grounds and as a result, the person against whom the power is exercised is exposed to unwarranted injury, the authority may be deemed to have intended to exercise its powers in order to achieve collateral purposes.

86. In my view however, the final decision herein does not rest upon the issue whether or not the Respondent was legally entitled to collect the taxes due or whether or not taxes were actually due. The decision rests on the process that was being adopted by the Respondent in the exercise of its statutory obligation. Whereas this Court appreciates the role of the Respondent in the collection of taxes which is the mainstay of development in this Country, and that all those who are liable to pay taxes ought to do so no matter the amount as long as the same is lawful, in the exercise of its mandate the Respondent is expected to be guided by the national values and principles of governance in Article 10 of the Constitution one of which is integrity. In my view, efficiency in public finance is a component of integrity. A body entrusted with the collection of revenue ought not to be seen to be lethargic in the conduct of its affairs and whereas the law allows the Respondent a period within which to confirm its record, that period ought not to be taken as a derogation of Article of 47 of the Constitution that requires that administrative action be carried out expeditiously.

87. Apart from that since in making its decision the Respondent was purportedly applying the law, it was constitutionally obliged pursuant to Article 10(1)(c) of the Constitution to comply with the national values and principles of governance and in my view this include fair administrative action as enshrined in Article 47 of the Constitution which provides as hereunder:

(1) Every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair.

(2) If a right or fundamental freedom of a person has been or is likely to be adversely affected by administrative action, the person has the right to be given written reasons for the action.

88. This was the position adopted in Judicial Service Commission vs. Mbalu Mutava & Another [2015] eKLR,in which the Court of Appeal held that:

“Article 47(1) marks an important and transformative development of administrative justice for, it not only lays a constitutional foundation for control of the powers of state organs and other administrative bodies, but also entrenches the right to fair administrative action in the Bill of Rights. The right to fair administrative action is a reflection of some of the national values in article 10 such as the rule of law, human dignity, social justice, good governance, transparency and accountability. The administrative actions of public officers, state organs and other administrative bodies are now subjected by article 47(1) to the principle of constitutionality rather than to the doctrine of ultra vires from which administrative law under the common law was developed.”

89. In other words the Respondent is under a constitutional obligation to be efficient and when its failure to adhere to this constitutional decree renders its decision unfair, the same is liable to be struck out as amounting to abuse of power. As was held in Noor Maalim Hussein & 4 Others vs. Minister of State for Planning, National Development and Vision 2030 & 2 Others [2012] eKLR:

“If statutory power is exercised in a manner contrary to the drafters or against public interest, the power can be said to have been exercised capriciously, irrationally or unreasonably. Thus irrationality and unreasonableness would play a major role and we shall as courts continue to assert our traditional duty and intervene in situations where authorities like ministers and persons act in bad faith, abuse power, fail to take into account relevant considerations or act contrary to legitimate expectations.”

90. Having considered the issues raised in this application, it is my view and I so hold that on the ground of legitimate expectation, abuse of or wrongful exercise power and irrationality the Respondent’s decision cannot be allowed to stand. My view is reinforced by the decision in Keroche Case (supra) at page 23 that“a decision tainted with abuse of power is not severable... and once tainted always tainted in the eyes of the law”.

91. With respect to the tax refunds, the Respondent did not dispute the same. I agree with the position in Republic vs. Kenya Revenue Authority Exparte L.A.B International Kenya Limited Misc Civil Application Number 82 of 2010 (Unreported), Kenya Data Networks Limited vs. Kenya Revenue Authority [2013] eKLR and Tata Chemicals Magadi Limited vs. Commissioner of Domestic Taxes (Large Taxpayers) [2014] eKLR that the Respondent is under an obligation to act upon the Applicant’s VAT refunds timeously and the failure to do so amount to a breach of the applicant’s right to a fair administrative action under Article 47 of the Constitution. I further agree that a taxpayer who carries own business in accordance with the law is entitled to a refund as a matter of right and that the process of verification and processing the claim must, in the word of Article 47 of the Constitution, be efficient and expeditious.

92. I reiterate that the financial public requires decisiveness and finality in the conduct of their financial affairs and they should not be placed in limb or state of uncertainty for unnecessarily too long as to when their money will eventually be refunded to them. The economy with the current volatile financial markets cannot afford to have such uncertainty. Therefore where it has been ascertained that a tax payer is entitled to a refund, such refund ought to be made timeously and without unreasonable delay to enable them invest the same.

93. In the premises, it is my view and I hereby find that it would be contrary to justice to compel the applicant to pay the sum demanded by the Respondent. To do so would be contrary to substantive fairness which dictates that a body must not act conspicuously unfairly, nor unfairly as to abuse its power, nor in unjustified breach of legitimate expectations.

94. Accordingly, based on the said grounds, the Notice of Motion dated 9th October, 2007 is merited.

Order

95. Consequently, I issue the following reliefs:

1) An order of Certiorari removing into this Court for purposes of it being quashed the decision and order of the Commissioner of Domestic Taxes dated 8th March 2007 wherein he has demanded payment of Value Added Tax on the Applicant’s Local Sales for export which decision is hereby quashed.

2) An order of Mandamus compelling the Commissioner of Domestic Taxes to refund the excess input Value Added Tax to the Applicant which amounted to Kshs.241,000,000. 00 as at 1st December 2006.

3) The Respondent shall pay the costs of the proceedings.

96. Orders accordingly.

Dated at Nairobi this 19th day of July, 2017

G V ODUNGA

JUDGE

Delivered in the presence of:

Miss Malik for the applicant

Miss Ochako for the Respondent

CA Mwangi