[2023] KETAT 882 (KLR)

Ruiru Feeds Limited v Commissioner of Legal Services & Board Coordination (Tax Appeal 765 of 2022) [2023] KETAT 882 (KLR) (10 November 2023) (Judgment)

Neutral citation: [2023] KETAT 882 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 765 of 2022

RM Mutuma, Chair, M Makau, EN Njeru, W Ongeti & BK Terer, Members

November 10, 2023

Between

Ruiru Feeds Limited

Appellant

and

Commissioner of Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya and a registered taxpayer.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5 (2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The dispute in this Appeal arose when the Respondent noted inconsistencies between input VAT claimed by the Appellant and its supplier’s declaration of the corresponding invoices and raised an automated assessment on the 20th March 2020 on VAT for the period February to May 2018 amounting to Kshs. 8,496,455. 00.

4. The Appellant disputed the Respondent’s findings and lodged its notices of objection to the assessments on 20th January 2022.

5. The Respondent upon consideration of the Appellant’s Objection to the assessment, issued an Objection decision dated 23rd June 2022.

6. The Appellant being aggrieved by the Objection decision issued by the Respondent, lodged this Appeal, filing its Notice of Appeal on the 22nd July 2022.

The Appeal 7. The Appellant’s Memorandum of Appeal dated 20th July 2022 and filed on the 22nd July 2022 is premised on the following grounds, that;a.The Respondent erred in fact and law by disallowing input VAT contrary to the provisions of the VAT Act 2013. b.The Respondent erred in fact and law by disallowing input VAT based on a mere claim that copies of invoices and proof of payment were not provided.

Appellant’s Case 8. The Appellant’s case is premised on the herein under filed documents before the Tribunal;a.The Appellant’s Statement of Facts dated 20th July 2022 and filed on the 22nd July 2022 together with the documents attached thereto.b.The Appellant’s written submissions dated 6th March 2023 and filed on the 24th March 2023 together with the authorities attached thereto.

9. That the Appellant stated that the Commissioner issued a tax assessment for the periods February 2018 to May 2018 for VAT amounting to Kshs. 8,496,455. 00.

10. That the Appellant objected to the additional assessment dated 20th March 2020 (sic) in its entirety via notice of objection dated 20th January 2022, by giving all explanations and relevant support documents to the claimed additional assessment.

11. That vide the objection decision dated 23rd June 2022, the Commissioner confirmed the additional assessment, the Appellant being dissatisfied filed a Notice of Appeal dated 20th July 2022.

12. That the Appellant stated that the Commissioner’s objection decision confirmed the additional assessment outside the legal timelines as provided for under Section 51 (11) of the Tax Procedures Act 2015, that the objection decision was issued four months after the notice of objection was filed.

13. That Section 51 (11) of the Tax Procedures Act provides that where the Commissioner has not made an objection decision within 60 days from the date that the taxpayer lodged a notice of objection, the objection shall be allowed. That the objection decision by the Commissioner has not met the threshold of this Section of the law and therefore the notice of objection decision is not valid.

14. That the Commissioner disallowed input VAT contrary to Section 17 of the VAT Act 2013, when it was clear that the Appellant had fully complied with the VAT Act. That it was registered for VAT, it made taxable supplies charging VAT thereof, it claimed input VAT from its suppliers within the stipulated time and it is in possession of original tax invoices issued for the supply. That the Appellant was therefore entitled to claim input VAT and has attached copies of all disallowed Invoices with ETR receipts and applicable delivery notes.

15. That the Commissioner disallowed input VAT on the grounds that the disallowed invoices do not qualify for claim under Section 17 of the VAT Act, this claim has not been supported by any explanation from the Commissioner or any evidence. That the unsupported suggestions or presumptions that the goods were not bought and delivered was therefore inaccurate and untenable. That the Commissioner was trying to attribute non-compliance of the listed suppliers to the company which cannot be a basis of disallowing input VAT as provided for under the VAT Act No. 35 of 2013 or any other law of Kenya.

16. That the attached bundle of documents is proof that the Appellant indeed purchased goods from the listed suppliers. The Appellant made payments for all the purchasers as can be confirmed from the attached bundle of documents, that have been attached, copies of invoices, proof of payments and delivery notes thereof.

17. That the facts and circumstances giving rise to this Appeal clearly points to abuse of office and power by the Commissioner and the Honourable Tribunal should not sanction such abuse of power (sic).

18. That it was the Appellant’s considered view that a claim for input VAT should be based on the documents listed under Section 17 (3) of the VAT and which are listed below;i.An original tax invoice issued for the supply or a certified copy.ii.Customs entry duly certified and receipt for tax payment.iii.Customs receipt and a certificate stating the amount of tax paid.iv.Credit note.v.Debit note.

19. That from the above referenced provisions, it is the Appellant’s position that the VAT Act is clear as to what considerations the Respondent should have made in processing the VAT claims and which it reiterated that it had complied with to the letter.

20. That despite the Appellant having met the threshold set out for VAT input claims, the Respondent disallowed input VAT allegedly on the grounds that there was discrepancy between what the Appellant declared and those of its suppliers.

21. That the Appellant submitted that the assessments were not only inaccurate and unreasonable but also unfair since the Appellant had nothing to do with its suppliers.

22. That by insisting that the Appellant’s suppliers did not supply the goods and completely disregarding the documents provided by the Appellant, the Respondent was introducing grounds that are not provided for in law to deny it legitimate input VAT claims.

23. That the Respondent unfairly attributed non-compliance of the listed suppliers to the Appellant which cannot be a legal basis of disallowing input VAT and the same is envisaged in the provisions of the VAT Act or any other law.

24. The Appellant submitted that the Respondent in arriving at the objection decision, alleged that the input tax claimed could not be allowed because the suppliers of the Appellant did not supply goods nor deliver them.

25. The Appellant maintained that the input VAT claims ought to have been allowed by the Respondent.

26. The Appellant stated that it filed it objection on 20th January 2022 and the Respondent rendered its objection decision on 20th July 2022, which is approximately 182 days upon the filing of the objection and which was out of the 60 days as is prescribed in the Tax Procedures Act. Further, that there was no communication or any further requests to the Appellant during this period or any engagement whatsoever.

27. The Appellant contended that the Respondent had no jurisdiction to demand the taxes because it is deemed to have allowed its objection to the assessment by virtue of Section 51 (11) of the Tax Procedures Act and by virtue of the Respondent’s failure to communicate its decision to the objection within the statutory period.

28. That the Appellant stated that it complied with the requirements set out in the law, particularly Section 17 of the VAT Act for its input VAT claim. In the circumstances, the Appellant had a legitimate expectation that the Respondent would allow its input VAT claims.

29. The Appellant submitted that the arbitrary decision by the Respondent with respect to the input VAT claims by the Appellant amounted to the thwarting of its legitimate expectations that the said claims would be allowed.

30. That the Appellant submitted the Respondent is under duty to direct itself properly in law, that the Respondent ought to have paid attention to matters which it is bound to consider such as the provisions of Section 17 of the VAT Act and Section 15 (1) of the Income Tax Act in arriving at tax assessments.

31. In fortifying it position as submitted the Appellant relied on the following cases;a.Republic vs. Kenya Revenue Authority Ex-parte Abardare Freight Services Ltd & Others [2004] 2 KLR 530. b.Keroche Industries Limited vs. Kenya Revenue Authority & Others Nairobi HCMA No. 73 of 2006 [2007] KLR 240. c.Fleur Investments Limited vs. Commissioner of Domestic Taxes & Another [2018] eKLR.

Appellant’s Prayers 32. The Appellant made the following prayers to the Tribunal, that;i.The additional assessments established by the Respondent for the period under review February 2018 to May 2018 for Kshs. 8,496,455. 00. together with penalties and interest, were unlawful and improperly assessed and as such the same should be set aside.ii.The Appeal herein be allowed with costs in favour of the Appellant.iii.Any other remedy that this Honourable Tribunal deems just and reasonable.

Respondent’s Case 33. The Respondent’s case is premised on the herein under filed documents before the Tribunal;a.The Respondent’s Statement of Facts dated and filed on 25th August 2022. b.The Respondent’s written submissions dated and filed on the 23rd February 2023 together with the authorities annexed thereto.

34. The Respondent stated that it noted inconsistencies between input VAT claimed by the Appellant and its suppliers’ declarations of the corresponding invoices.

35. The Respondent averred that on the 20th March 2020 it raised an automated assessment on the Appellant for the period January to May 2018.

36. That the Appellant lodged a late objection and upon acceptance, the Appellant was requested to avail records/documents in support of the disallowed input VAT, however, the same were not availed.

37. That the Appellant’s objection was rejected and the Respondent confirmed the additional assessment in totality vide the letter dated 23rd June 2022.

38. That the Respondent in its considered view identified three issues for determination in the Statement of Facts and written submissions, namelya.Whether the Appellant lodged a valid objection.b.Whether the Objection Decision was duly issued in line with the statutory requirements.c.Whether the Respondent erred in law and in fact by disallowing input VAT as per Section 17 of the VAT Act.

39. The Respondent submitted that for an objection to be validly lodged, a taxpayer ought to lodge the notice of objection within 30 days of receipt of the assessment as provided for in Section 51 (2) of the Tax Procedures Act.

40. The Respondent relied on Section 51 (2) of the TPA and stated that it issued the additional VAT Automated Assessments for the period from February 2018 to May 2018 on the 15th November 2019, while the Appellant lodged its notice of objection on 23rd February 2022, a period more than two years after the notice of assessment was issued.

41. That in addition, for the notice of objection to be valid, the Appellant ought to precisely state the grounds of objection, has to pay all the taxes not in dispute and support its grounds by adducing sufficient and relevant documents as is provided under Section 51 (3) of the Tax Procedures Act, that the documents were never availed therefore leading to the Respondent rejecting the objection and the objection decision being issued within the stipulated statutory timelines.

42. The Respondent stated that the Appellant lodged a late objection on 23rd February 2022 and did not comply with Section 51 (6) of the Tax Procedures Act, that in this instance the Appellant was first of all required to file an application seeking extension of time to lodge a notice of objection which the Appellant failed to do.

43. That the Respondent notified the Appellant of the same and the Appellant availed reasons for the late objection which upon review were found satisfactory and the late objection was accepted and notice of acceptance issued to the Appellant on 25th April 2022.

44. That the Respondent asserted that the Appellant’s objection was validly lodged on 25th April 2022 and that the objection decision was within the statutory timelines provided under the law.

45. The Respondent stated that the Appellant’s objection was subsequently rejected and it confirmed the additional assessments in totality vide the letter dated 23rd June 2022.

46. The Respondent stated that the Appellant having failed to lodge a valid objection pursuant to the provisions of Section 51 (3) of the Tax Procedures Act and prove that the assessment was erroneous, the Respondent states that it was proper in determining that the Appellant’s notice of objection was invalid and as such, the Respondent’s Assessment Order remains valid and prayed to the Honourable Tribunal to uphold the same.

47. The Respondent submitted that the additional assessments issued on 15th November 2019 as well as the confirmation assessment notices issued on 23rd June 2022 are valid for the reasons that although the Appellant was given an opportunity to sort out the inconsistencies noted in it returns, the Appellant failed to so do within the given timelines. Further the Appellant failed to support its notice of objection as provided for in Section 51 (3) of the Tax Procedures Act.

48. The Respondent submitted that there was no valid notice of objection before the 25th April 2022 to warrant the provisions in Section 51 (8) of the TPA to be invoked, which mandates the Commissioner to consider a validly lodged notice of objection within time and render an objection decision.

49. That the Respondent referred to Section 51 (11), which states that;“the Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed”

50. That the Respondent stated that the Commissioner was not limited by the provisions of Section 51 (11) of the TPA to render an objection decision within sixty (60) days as there was not validly lodged notice of objection prior to 25th April 2022.

51. The Respondent stated that, however, should the Tribunal not be minded to agree with the Respondent on its submissions, it was the Respondent’s submission that it is the time spent in between wherein the Appellant was engaged, offered advice, given time to validate its objection by providing relevant information/documents for consideration by the Respondent, ought to form part of the process in computing time.

52. The Respondent submitted that the Appellant failed to provide documents required under Section 17 (3) of the VAT Act.

53. That the Respondent relied on Section 56 (1) of the TPA and Section 30 of the Tax Appeals Tribunal Act and stated that it is upon the Appellant to prove that the Respondent’s decision did not meet the threshold set under the provisions of the law and also the Respondent erred in disallowing the input VAT.

54. That the Respondent submitted that it has demonstrated before the Tribunal what was considered in arriving at the assessment and subsequently the objection decision is within the law.

55. The Respondent stated the assessment and objection decision were proper in law and the taxes are due and urged the Tribunal to find that the same was in conformity with the law.

56. The Respondent in fortifying its case relied on the following case law;a.Pearson vs. Belcher CH.M Inspector of Taxes, Tax Cases Volume 38. b.Alfred Kioko Muteti vs. Timothy Miheso & Another [2015] eKLR.c.Cape Brandy Syndicate vs. Inland Revenue Commissioner [1921] 1 KB, at page 64. d.Primarosa Flowers Limited vs. Commissioner of Domestic Taxes [2019] eKLR.

Respondent’s Prayers 57. The Respondent prayed for this Tribunal, that;i.The A Appeal be dismissed for lack of merit.ii.The decision by the Respondent issued on 23rd June 2022 be upheld.iii.The Respondent be awarded costs of the Appeal.

Issues for Determination 58. The Tribunal upon the careful consideration of the pleadings, Statements of Facts and submissions made by the parties respectively, was of the view that the issues that recommend themselves for its determination are;a.Whether the objection decision was validly issued.b.Whether the Respondent was justified in disallowing the Appellant’s input tax VAT and confirming the assessment.

Analysis and Determination 59. The Tribunal having established the issues for its determination proceeds to analyse the same as herein under;

a. Whether the objection decision was validly issued. 60. The Appeal before the Tribunal is anchored on the Appellant’s dissatisfaction with the Respondent’s objection decision made on the 23rd June 2022.

61. Prior to the objection decision, it has been stated that the Respondent raised an additional assessment vide the letter dated 15th November 2019, to which the Appellant lodged its notice of objection.

62. It was the Appellant’s assertion that upon lodging of the objection on the 20th January 2022, the Respondent never contacted the Appellant to notify it that its objection was late and that the Appellant was required to validate the same, the Appellant submitted that thereafter it received the objection decision of 23rd June 2022 and that the same was made out of time.

63. The Respondent on the other hand, submitted that the Appellant lodged its notice of objection on the 23rd February 2022 and was notified of the same, that Appellant availed the reasons for the late filing and upon review by the Commissioner the same was found to be satisfactory. The late objection was then accepted and a notice of acceptance of the late objection was sent to the Appellant on 25th April 2022.

64. It was the Respondent’s position that the Appellant’s objection was validated by the Commissioner on 25th April 2022 and deemed as validly lodged on that date. Therefore, time as per Section 51 (8) as read together with Section 51 (11) began to run as from 25th April 2022.

65. The Respondent further submitted that upon validation of the objection, the Respondent requested for documentation/information in support of the disallowed input VAT from the Appellant, which the Appellant failed to furnish and/or provide to the Respondent and consequently the Respondent issued the objection decision on 23rd June 2022.

66. The Tribunal has perused the record and noted that the Appellant attached copies of the following documents, while the Respondent did not attach any documents to its Statement of Facts;a.Demand notice for assessed taxes dated 20th March 2020. b.Notice of objection dated 20th January 2022. c.Objection decision dated 23rd June 2022. d.Bundle of documents relied on by the Appellant.

67. The Tribunal’s perusal of the Objection decision revealed that at the point of lodging the late objection, the Appellant had provided and/or availed documents to the Respondent among other information.

68. The Tribunal did not sight the Respondent’s letter notifying the Appellant of its late objection and requesting for grounds for validation as is required under Section 51 (2) of the TPA, the date of the notice has not been provided by the Respondent and it therefore remains unclear as to when the same could have been done.

69. Similarly, the notice of acceptance indicated to have been issued on 25th April 2022 as well as the letter for request for further documents/information have not been placed on record for the Tribunal’s perusal.

70. The Tribunal observed that notice of objection was lodged on 20th January 2022 according to the Appellant and on 23rd February 2022 according to the Respondent objecting to the VAA issued on 15th November 2019, on either date the Appellant’s notice of objection was invariably lodged late.

71. The Respondent averred that it allowed the Appellant’s late objection, vide the notice of acceptance dated 25th April 2022, and that time began to run on the same date and not any other.

72. On the other hand, the Tribunal noted that the Appellant did not demonstrate that it presented an application before the Commissioner seeking extension of time as provided under Section 51 (6) of the Tax Procedures Act.

73. The prevailing circumstances are governed by Section 51 (8) of the TPA which Section obligates the Commissioner to issue an objection decision on a valid Objection within 60 days, the Section provides that:-“51 (8)Where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, and Commissioner's decision shall be referred to as an "objection decision".

74. The above cited provision is framed in mandatory terms requiring the Commissioner to make an objection decision in the circumstances or events as provided therein.

75. The Tribunal noted, that there was no evidential material placed before it in confirmation that the Appellant sought the extension of time to have its late Objection accepted in accordance to Section 51 (8) of the Tax Procedure Act.

76. The Tribunal’s position is that, in the absence any evidence that the Appellant sought the extension of time, it can only revert to the notice acceptance of the late objection as submitted by the Respondent.

77. It is the Tribunal’s considered view that time began to run on the date the notice of acceptance of late objection being 25th April 2022 and not any other date.

78. Consequently, it is the Tribunal’s finding that the objection decision of 23th June 2022 was issued to the Appellant within the period prescribe in law.

b. Whether the Respondent was justified in disallowing the Appellant’s input tax VAT and confirming the assessment. 79. The Appellant submitted that the Respondent disallowed input VAT contrary to Section 17 of the VAT Act 2013, when it was clear that the Appellant had fully complied with the VAT Act.

80. The Appellant asserted that it was registered for VAT, it made taxable supplies charging VAT thereof and claimed input VAT from its suppliers within the stipulated time and it is in possession of original tax invoices issued for the supply.

81. The Appellant submitted that it was therefore entitled to claim input VAT and had attached copies of all disallowed Invoices with ETR receipts and applicable delivery notes.

82. It was the Appellant’s contention that the Respondent disallowed the input VAT on the grounds that the disallowed invoices did not qualify for claim under Section 17 of the VAT Act, further that this claim had not been supported by any explanation to the Respondent or any evidence.

83. That it was the Appellant’s considered view that a claim for input VAT should be based on the documents listed under Section 17 (3) of the VAT and which are listed below;i.An original tax invoice issued for the supply or a certified copy.ii.Customs entry duly certified and receipt for tax payment.iii.Customs receipt and a certificate stating the amount of tax paid.iv.Credit note.v.Debit note.

84. From the above provisions, it was the Appellant’s position that the VAT Act is clear as to what considerations the Respondent should have made in processing the VAT claims and which it reiterated that it had complied with to the letter.

85. The Appellant submitted that despite the Appellant having met the threshold set out for VAT input claims, the Respondent disallowed input VAT allegedly on the grounds that there was a discrepancy between what the Appellant declared and those of its suppliers.

86. On the other hand, the Respondent contented that the Appellant failed to provide documents required under Section 17 (3) of the VAT Act for its consideration.

87. The Respondent in disallowing the input VAT claim insisted that the Appellant’s suppliers did not supply the goods.

88. The Respondent submitted that the Appellant by failing to produce the documents, did not discharge its burden of proof in accordance with Sections 56 (1) of the TPA and 30 of the TAT Act.

89. The Tribunal observes that Section 17 (2) of the VAT Act imposes a time frame within which any taxpayer may make a claim for input VAT, which Section provides as follows:-“If, at the time when a deduction for input tax would otherwise be allowable under subsection (1), the person does not hold the documentation referred to in subsection (3), the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation. Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.”

90. The issue to be ascertained by the Tribunal, is whether the disallowed input VAT was made within the six-month period of the date of such supply.

91. The Tribunal has perused the documents presented by the Appellant, particularly the invoices and noted that the same are supported by ETR receipts, which were issued in conformity with Section 17 (2) of the VAT Act.

92. The Respondent’s assertion is that there was no supply made and further the invoices did not conform with the law, there was evidentiary material in support of supplies, and the Tribunal is persuaded that indeed there were supplies made.

93. The Respondent submitted that pursuant to the notice of acceptance of late objection, it requested for documents from the Appellant, which the Respondent asserted that the Appellant did not provide.

94. The Respondent’s objection decision was premised on the failure of the Appellant to provide documents requested.

95. The burden of proof in tax matters is placed on the Appellant, Sections 56 (1) of the TPA, provides as thus:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

96. Further, Section 30 of the TAT Act on burden of proof, provides that;“In a proceeding before the Tribunal, the Appellant has the burden of proving –a.Where an appeal relates to an assessment, that the assessment is excessive; orb.In any other case, that the tax decision should not have been made or should have been made differently”

97. It follows that the Appellant was required to demonstrate that the burden of proof had been discharged. In the case of Primarosa Flowers Limited vs. Commissioner of Domestic Taxes [2019] eKLR, Makau J observed as follows:-“in tax disputes, the taxpayer must satisfy the burden of proof to successfully challenge income tax assessments. The onus is on the taxpayer in proving that assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied.”

98. The Tribunal perused the Appellant’s Objection dated 20th January 2022, in which the Appellant indicated that it had attached the relevant documents/evidence to the appendix thereof, and the Respondent in its objection decision of 23rd June 2022 admitted to have received “written correspondences and documents availed”.

99. The Tribunal is therefore persuaded that the Appellant provided documents, and the Respondent cannot admit receipt of documents on one hand and deny that documents were not availed on the other.

100. The Tribunal is of the view that the documents placed before it are in conformity with the law, particularly Section 17 (3) of the VAT Act and the same were provided to the Respondent whom ought to have interrogated and examined the same.

101. The Tribunal is not persuaded that the Respondent was justified in disallowing the input VAT and confirming the assessment in light of the documents presented by the Appellant.

Final Decision 102. The upshot of the foregoing is that the Appeal is merited and the Tribunal accordingly proceeds to make the following Orders; -a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision rendered on 23rd June 2022 be and is hereby set aside.c.Each party shall bear its own costs.

103. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF NOVEMBER, 2023ROBERT M. MUTUMA - CHAIRPERSONMUTISO MAKAU - MEMBERELISHAH N. NJERU - MEMBERDR. WALTER ONGETI - MEMBERBONIFACE K. TERER - MEMBER