[2022] KEHC 12992 (KLR)

Republic v Commissioner of Domestic Taxes; London Distillers K Limited (Exparte Applicant) (Miscellaneous Application 004 of 2022) [2022] KEHC 12992 (KLR) (Commercial and Tax) (16 September 2022) (Ruling)

Neutral citation: [2022] KEHC 12992 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Commercial and Tax

Miscellaneous Application 004 of 2022

A Mabeya, J

September 16, 2022

IN THE MATTER OF: AN APPLICATION FOR JUDICIAL REVIEW ORDERS OF CERTIORARI, PROHIBITION AND MANDAMUS AND PROHIBITION AGAINST THE DECISION OF THE COMMISSIONER OF DOMESTIC TAXES DATED 2ND MARCH 2022 AND 17TH MARCH 2022 IN THE MATTER OF: SECTION 37(2) AND 89 OF THE TAX PROCEDURES ACT 2015

Between

Republic

Applicant

and

Commissioner of Domestic Taxes

Respondent

and

London Distillers K Limited

Exparte Applicant

Ruling

1. Vide a summons in chambers dated March 23, 2022, the ex-parte applicant moved this court seeking leave to apply for orders for certiorari, prohibition and mandamus against the respondent.

2. Upon such leave being granted on March 26, 2022, the ex-parte applicant took out a motion on notice dated April 1, 2022 seeking the above orders. Certiorari was to quash the respondent’s decision contained in a letter dated March 2, 2022 demanding payment of Kshs 517,118,680/=, prohibition was against the respondent’s enforcement of that decision, while mandamus was to compel the respondent to comply with the decision dated January 20, 2022 and accept the continued payment of Kshs 80 million by installments.

3. The grounds for the motion were that; vide a letter dated September 15, 2021, the ex-parte applicant applied to the Cabinet Secretary, National Treasury and Planning for abandonment of Kshs 517,118,680/= which the ex-parte applicant had collected as excise duty in the course of its business, an amount which was now being demanded by the respondent.

4. Vide it’s letter dated January 20, 2022, the National Treasury allowed the application and approved abandonment of 80% of the outstanding principal excise tax and waived 100% of penalties and interest in accordance with sections 37 and 89 of the Tax Procedures Act, 2015.

5. That vide an email dated February 2, 2022, the respondent wrote to the ex-parte applicant acknowledging the outcome of the abandonment and demanded the sum of Kshs 80 million, being the 20% outstanding tax arrears. The parties then agreed the liquidation of the said amount by weekly installments of Kshs 7,500,000/= beginning February 2, 2022. As at the time of lodging the application a total sum of Kshs 55,000,000/= and would have fully paid by April 29, 2022.

6. However, on March 2, 2022, the respondent advised the ex-parte applicant that after due consultation, the approval given on January 20, 2022 had been rescinded and the entire sum of Kshs 517,118,680/= ought to be paid within 7 days failure to which the respondent would institute enforcement measures. It was the ex-parte applicant’s case that it had not received any communication from the National Treasury rescinding its decision of January 20, 2022 nor was there an application or hearing to rescind the decision.

7. That the respondent acted arbitrarily and in excess of its powers by unilaterally arriving at a decision parallel from that of the National Treasury. That the respondent had failed to respond to its letter of March 3, 2022 protesting the said action. Agency notices issued on March 17, 2022 were lifted after negotiations but the respondent continued to demand the said sum of Kshs 517,118,680/=.

8. It was contended that the respondent had unilaterally assumed the powers of the National Treasury under the Tax Procedures Act and set aside the National Treasury’s decision in the absence of the parties involved. That the respondent’s decision was unlawful and ultra vires.

9. The respondent opposed the application vide the replying affidavit of Victor Mino sworn on April 8, 2022. He averred that the ex-parte applicant did a self-assessment returns for January 2020 to August 2021 for taxes amounting to Kshs 529,278,680/= but failed to remit the same. The parties negotiated and entered into consents on settling the taxes.

10. However, instead complying with the settlement aforesaid, on September 15, 2021 the ex-parte applicant applied for abandonment of the taxes to the National Treasury. The National Treasury wrote to the respondent on October 1, 2021 seeking its advice on the application. The respondent advised on December 22, 2021 that the application was not tenable as it failed to meet the threshold under section 37(1) of the Tax Procedures Act ('the Act'). Nevertheless, Treasury partially allowed the abandonment.

11. Then, pursuant to section 5 (2) (b) of the Kenya Revenue Act, the respondent wrote to treasury and the Attorney General on January 1, 2022 explaining to them what agency taxes entailed. The Attorney General advised treasury on February 22, 2020 on the on the legal position and the procedure for abandonment of taxes. That the process of abandonment was supposed to be initiated by the commissioner if he determined that the application met the threshold for abandonment for approval of the Cabinet Secretary Treasury, not vice versa.

12. The Cabinet Secretary agreed with the respondent and rescinded the approval by the Principal Secretary. This was communicated to the ex-parte applicant on March 2, 2022.

13. The respondent contended that, excise tax was an agency tax meaning that the actual payers were the consumers of the ex-parte applicant’s products. That the ex-parte applicant was an agent of the government and was mandated to collect and remit the excise tax. That an abandonment of the tax was equivalent to allowing the ex-parte applicant to finance its operations by using tax-payers money/taxes. That under section 37 of the Act, an application for waiver of any taxes is to be made to the commissioner for consideration and upon determination, the same is forwarded to Cabinet Secretary for approval based on the commissioner’s determination.

14. The respondent relied on the doctrine of illegality on basis that no one should benefit from his/her own wrong doing and that the law should not condone illegality. That the treasury’s approval was contrary to section 37 of the Act and was thus void ab initio and could not be implemented.

15. In his further affidavit sworn on April 19, 2022 for the ex-parte applicant, Mohan Galot stated that the consent referred to by the respondent preceded the decision of treasury. That the decision of treasury had not been rescinded and the purported rescission had been made by the respondent contrary to the law. That it was the respondent who assessed the disallowed 20% at Kshs 80,000,000/ and the same was fully paid as at April 13, 2022.

16. The ex-parte applicant filed its written submissions dated April 16, 2022 while those of the respondents were dated April 25, 2022. The court has considered them.

17. In Republic v Nairobi City County ex parte; Gucharn Singh Sihra & 4 others (2014) Eklr, citing with approval the case of Republic vs Kenya Revenue Authority Ex parte Yaya Towers Limited (2008) Eklr, the court observed: -'The remedy of judicial review is concerned with reviewing not the merits of the decision of which the application for judicial review is made, but the decision-making process itself. It is important to remember in every case that the purpose of the remedy of judicial review is to ensure that the individual is given fair treatment by the authority to which he has been subjected and that it is no part of that purpose to substitute the opinion of the judiciary or of the individual judges for that of the authority constituted by law to decide the matter in question. Unless that restriction on the power of the court is observed, the court will under the guise of preventing abuse of power, be itself, guilty of usurpation of power'

18. In Zachariah wagunza & Another v Office of the Registrar, Academic Kenyatta University & 2 others (2013) Eklr, the court held: -'In order to succeed in an application for judicial review, the applicant has to show that the decision or act complained of is tainted with illegality, irrationality and procedural impropriety.Illegality, is when the decision-making authority commits an error of law in the process of taking the decision or making the act, the subject of the complaint. Acting without jurisdiction or ultra vires or contrary to the provision of a law or its principles are instances of illegality.Irrationality, is when there is such gross unreasonableness in the decision taken or act done that no reasonable authority, addressing itself to the facts and the law before it would have made such a decision. Such a decision is usually in defiance of logic and acceptable moral standards.Procedural impropriety, is when there is failure to act fairly on the part of the decision making authority in the process of taking a decision. The unfairness may be in non-observance of the rules of natural justice to act or to act with procedural fairness towards one to be affected by the decision – it may also involve failure to adhere and observe procedural rules expressly laid down in a statute or legislature instrument by which such authority exercises jurisdiction to make a decision.'

19. The case by the ex-parte applicant is that the respondent’s decision of March 2, 2022 of demanding payment of the full taxes was illegal. That there had been no application to review or set aside the decision of treasury abandoning 80% of the taxes. That the ex-parte applicant had not been heard in the rescission of the earlier decision by treasury. That the respondent had acted ultra vires as sections 37(2) and 89 of the Act barred the commissioner from recovering unpaid tax which had been deemed extinguished or abandoned once the Cabinet Secretary directed in writing that abandonment had been issued.

20. It was thus submitted that the respondent’s decision was un-procedural, illegal, unfair, prejudicial, made in bad faith, violated the legitimate expectation of the ex-parte applicant and constituted an abuse of power by the respondent. That as it were, the letter dated January 20, 2022 had not been revoked. That this court lacks jurisdiction to consider the merits of the decision by treasury and ought to confine itself to the decision-making process undertaken by the respondent.

21. On the other hand, the respondent’s case was that the dated January 20, 2022 by treasury abandoning taxes in accordance with section 37 of the Act was void ab initio. That only the commissioner could initiate the process of abandonment. That the Attorney General, who is the legal advisor to the government, had written to treasury on February 22, 2022 reaffirming the respondent’s position.

22. That under section 5(2) (b) of the Kenya Revenue Authority Act, it was obligated to advise the government on all matters relating to the administration and collection of revenue under the written laws. The cases of R vs Commissioner of Customs and Excise and the Attorney General ex parte Mwalimu Digore Nairobi HC Misc Appl JR No 62 of 2006 (unreported) and JR Misc Appl 285 of 2013 Bear Africa (L) Limited vs Commissioner of Customs Services, were cited in support of those submissions.

23. That the CS Treasury’s decision to abandon taxes on their own motion could not override the provisions of the law on abandonment of taxes. That treasury lacked the power to initiate the abandonment of taxes. Finally, that the letter from treasury did not create any legitimate expectation on the ex parte applicant as it was based on an illegality.

24. The issue for consideration is whether the decision of the respondent dated March 2, 2022 to demand full taxes despite treasury’s decision to abandon part of the taxes was irrational, illegal, unreasonable and untenable.

25. The beginning point is that, the respondent is the one mandated by law to administer taxes. Such administration includes assessment and collection by all means possible as provided by law. He can only demand that tax that is has been properly imposed by law and is due.

26. It is not in dispute that the ex-parte applicant made returns based on self-assessment that taxes amounting to Kshs 529,278,680/- had been collected by it and was due to the respondent. This was for the period January, 2020 and August, 2021. Instead of paying the same, the ex-parte applicant applied to treasury for abandonment.

27. Section 37 of the Act provides: -'1. This section applies where the commissioner determines that-a.It may be impossible to recover an unpaid taxb.There is undue difficulty or expense in the recovery of an unpaid tax; orc.There is hardship or inequity in relation to the recovery of an unpaid tax.'

28. Section 89 of the Act provides for general provisions relating to penalty. Subsection 6 provides: -'6. A person liable to a penalty or interest may apply in writing to the commissioner for the remission of the penalty or interest payable and such application shall include the reasons for the application.'

29. It is clear from the foregoing that section 37 of the Act only applies where the commissioner himself determines that the grounds therein exist. These are; that it is impossible to recover unpaid tax, or there is undue difficulty or expense in recovery of unpaid tax, or hardship or inequity in relation to recovery of an unpaid tax. In this regard, unless the commissioner determines the existence of any of these three conditions, there can be no application that section.

30. Further, only the commissioner can invoke that provision and no one else. It is once he invokes it that he refers the matter to the Cabinet Secretary for approval. In this regard, the process of tax abandonment starts with the respondent and no one else.

31. The foregoing being the case, treasury had no business to purport to allow the abandonment of 80% of the admitted taxes. That was extreme abuse of power and office on the part of treasury. Treasury purported to exercise a power it did not have. That purported abandonment was void ab initio.

32. Having been illegal as it were, that decision could not confer any right whatsoever on the ex-parte applicant or any obligation on the respondent. No legitimate expectation could arise from an illegality. See Republic vs Kenya Revenue Authority exparte Shake Distributors Limited (2012) Eklr.

33. Having found the decision of treasury to be illegal and of no effect, in the circumstances, what is the position of the respondent’s decision of March 2, 2022 demanding payment of Kshs 517,118,680/=.

34. On receipt of the CS Treasury’s letter dated September 15, 2021 about the ex-parte applicant’s application for abandonment of taxes, the respondent advised on d December 22, 2021 that none of the reasons given by the ex parte met the conditions under section 37 of the Act. He properly explained that the taxes sought to be abandoned arose from a self-assessment for the period between January 2020 to August 2021 and constituted taxes collected by the ex-parte applicant from third parties for onward transmission to him. That since the ex-parte applicant was a going concern, it was able to pay the full amount of Kshs 529,278,680/=. He did not recommend abandonment of tax. The respondent maintained this position and was supported by the Attorney General.

35. All the foregoing goes towards one destination, that the respondent was not acting maliciously but following the law. His decision cannot be said to be unlawful or irrational as was that of treasury. He was not bound by the illegal decision of treasury.

36. In JR Misc Appl 285 of 2013 Republic v Kenya Revenue Authority & another Ex-Parte Bear Afric (K) Limited, the court held: -'Whereas, KRA and the commissioner have an obligation under section 4 of the Government Financial Management Act to obey instructions from the treasury, the obligation of the commissioner to satisfy himself of the legality of instructions is not discharged by Act. In this case, the commissioner detected several anomalies which indicated that exemption ought not to have been granted. Key to this anomaly is the fact that the importer KPLC affirmed that it had not applied and was not entitled to a tax remission under the subject contract as confirmed in its letters dated July 8, 2013 and May 31, 2013 which I have outlined at paragraphs 13 and 15 above.'

37. The respondent ought not be put in a position whereby it complies with ministerial directives which are illegal or unlawful. The respondent, being the master of taxes and tax laws, had a duty to evaluate the application for abandonment of taxes vis a vis the statutory requirements to be met before such approvals are issued. He similarly had a duty to confirm that the right procedure had been followed.

38. Accordingly, the respondent’s decision of March 2, 2022 demanding payment of Kshs 517,118,680/= was lawful and not illegal, irrational or un-procedural as contended.

39. In view of the foregoing, the application dated April 1, 2022 is without merit and is hereby dismissed with costs to the respondent.It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 16TH DAY OF SEPTEMBER, 2022. A MABEYA, FCIArbJUDGE