[2023] KETAT 881 (KLR)

Sagoo Electricals Limited & 2 others v Commissioner of Domestic Taxes (Tax Appeal 543 of 2022) [2023] KETAT 881 (KLR) (10 November 2023) (Judgment)

Neutral citation: [2023] KETAT 881 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 543 of 2022

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

November 10, 2023

Between

Sagoo Electricals Limited

1st Appellant

Kuldip Singh Sagoo

2nd Appellant

Kiranjeet Kaur Kuldip Singh Sagoo

3rd Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The 1st Appellant, Sagoo Electricals Limited is a limited liability company registered in Kenya. Its principal activity is in electrical works and supplies.

2. The 2nd Appellant is a director and a shareholder of the 1st Appellant, legal spouse to the 3rd Appellant herein and the designated Managing Director of the said entity registered with the Respondent.

3. The 3rd Appellant is a Director and shareholder of the 1st Appellant and the legal spouse of the 2nd Appellant herein registered with the Respondent.

4. 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.

5. On 25th October 2021, the Respondent issued the 1st Appellant with findings from the concluded compliance verification, which resulted to tax liability amounting to Kshs.110,355,823. 00 arising from alleged significant under declaration of income in the company’s VAT and Income tax returns.

6. On 3rd December 2021, the 1st Appellant lodged a notice of objection to the tax findings totaling to Kshs.110,355,823. 00 stating that the withholding tax on deemed interest were inaccurate and the fringe benefit tax calculations were not correct.

7. On 23rd and 24th December 2021, the Respondent served the Appellant with additional assessments demanding tax liability totaling to Kshs. 26,889,532. 70 inclusive of interest.

8. On 6th January 2022 and 1st March 2022, the Respondent served the Appellants with a demand notice demanding taxes in arrears amounting to Kshs. 26,342,122. 80.

9. The Appellants being dissatisfied with the Respondent’s assessment and pursuant to the provisions of Section 51 of the TPA, the Appellant lodged a notice of objection to the income additional assessment on the 10th January 2022.

The Appeal 10. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal filed on 26th May 2022:-a.That the Respondent erred in law and fact by serving the Appellants with a demand notice demanding taxes in arrears amounting to Kshs. 110,355,823. 00 despite not responding to the Appellants’ notices of objection which resulted from the concluded compliance verification exercise.b.That the Appellant notice of objection dated 6th December 2021 objecting to the demand notice dated 25th October 2021 demanding for taxes in arrears amounting to Kshs. 110,355,823. 00 was filed in time. The Respondent erred in law and fact by issuing a late objection validity letter claiming that the Appellant’s objection was filed late.c.That the Respondent erred in law and fact by deeming the compliance verification findings letter as an assessment since the letter dated 25th October 2021 did not meet all the requirements in accordance to Section 31 (8) of the Tax Procedure Act of 2015. The Appellant contended that the late objection application validity letter was a compliance verification findings letter but not an assessment. The Appellant further contended that all the assessments originating from the compliance verification findings that were raised were objected to in time. The Appellants further requested the Respondent to work on the said letter and update their records.d.That the Respondent erred in law and fact in failing to review the documents provided despite the Appellants providing all the requested documents and information including valid objections against various assessments originating from the compliance verification findings that were raised.e.That the Respondent erred in law and fact by subjecting the Appellants to rigorous exercise to an extent of serving the Appellants with a notice of distress. The Respondent’s actions were not supported by any tax law and did not meet the threshold of Article 47 of the Constitution of Kenya.f.The Appellants requested this Honorable Tribunal to intervene on this matter and consider the substance of the documents provided in order to ascertain that the taxes being demanded are not payable.

Appellant’s Case 11. The Appellant’s case is supported by the Appellants’ Statement of Facts dated 25th May 2022 and filed on 26th May 2022 together with the documents attached thereto.

12. That the 1st Appellant, Sagoo Electricals Limited, is a limited liability company registered in Kenya. The Appellants is registered with the Respondent under Personal Identification Number P051386991W.

13. That the 2nd Appellant is a director and shareholder of the 1st Appellant, legal spouse to the 3rd Appellant herein and the designated Managing director of the said entity registered with the Respondent under Personal Identification Number A001754434T.

14. That the 3rd Appellant is a director and shareholder of the 1st Appellant and the legal spouse to the 2nd Appellant herein registered with the Respondent under Personal Identification Number A0067154960.

15. That the 1st Appellant's principal activities are in the field of electrical works and supplies.

16. That on 25th October 2021, the Respondent issued the Appellants with the findings from compliance verification which resulted to tax liability amounting to Kshs 110,355,823. 00 arising from alleged significant under declaration of income in the Appellants VAT and income tax returns.

17. That on 23th December 2021 and 24th December 2021, the Respondent served the Appellants with additional assessments demanding tax liability totaling to Kshs 26,889,532. 70. 00 inclusive of interest, respectively.

18. That dissatisfied with the Respondent's assessments and pursuant to the provisions of Section 51 of the TPA, the Appellants lodged the notices of objection to the income tax additional assessments of 10th January 2022.

19. That on 6th January 2022 and 1st March 2022, the Respondent served the Appellants with a demand notice demanding taxes in arrears amounting to Kshs. 26,342,112. 80.

20. That on 6th December 2021, the Appellants lodged a notice of objection to the additional tax assessment demanding a total of Kshs. 110,355,823. 00 stating that the withholding tax on management and professional fees was erroneous, withholding tax on deemed interest were inaccurate and the fringe benefit tax calculations were not correct. The said objection further particularized the Appellants objections as follows:-a.That the directors of the 1st Appellant have complied in meeting their tax obligations from the year 2015 to the year 2020b.That the computation of the schedule on the demand letter dated 25th October 2021 was not based on actual assessment of records.c.That the director of the company never engaged in any tax fraud as alleged in the demand letter.d.That all money transactions by the directors of the company can be well explained in detail and there are sufficient records to that effect.e.That the Respondent's findings and decision that tax offences were committed by the Appellants were based on limited information.

21. That on 16th February 2022 and 8th March 2022, the Respondent issued late objection application Validity letters asking for evidence to support the late objections within 7 days from the date of the letter in question. The Respondent deemed its findings to compliance verifications dated 25th October 2021 as the tax assessment that was being objected.

22. That the Appellant responded to the late objection application validity letter clarifying that it was not an assessment, the letter did not meet all the requirements in accordance to Section 31(8) of the TPA from the compliance verification findings that were raised were objected to in time. The Appellants further requested the Respondent to work on the letter dated 25th October 2021 and update their records.

23. That there were several discrepancies in the impugned demand dated 25th October 2021.

Appellant’s Prayers 24. That the Appellant prayed for the following orders:a.That the Respondent’s objection decisions issued on 6th January 2022 and 1st March 2022 were improper as they were made contrary to Section 51 (10) or 51 (11) of the TPA.b.That the Appeal be allowed and the Respondent’s objection decision of 6th January 2022 and 1st March 2022 be struck out for being improper in law.

Respondent’s Case 25. The Respondent’s case is supported by the Respondent’s Statement of Facts dated and filed on 21st February, 2023 together with the documents attached thereto.

26. That on 25th October 2021, the Respondent issued the Appellants with findings from the compliance verification, which resulted to tax liability amounting to Kshs 110,355,823. 00 arising from alleged significant under declaration of income in the company's VAT and Income tax returns

27. The Respondent stated that on 3rd December 2021, the Appellant lodged a notice of objection to the findings totaling to Kshs 110,355,823. 00 stating that the withholding tax and deemed interest were inaccurate and the fringe benefit tax calculations were not correct. Although an objection to the findings does not suffice

28. That the objection was lodged in the i-tax system and the taxpayer did provide any documents.

29. The Respondent averred that at it served the Appellant with additional assessments demanding tax liability totaling to Kshs. 26,889,532. 70 inclusive of interest on 23rd and 24th December 2021.

30. That on 6th January 2022 and 1st March 2022, the Respondent served the Appellants with a demand notice demanding taxes in arrears amounting to Kshs 26,342,122. 80.

31. That for Corporation tax, the Appellant filed income tax company returns for the years 2015 to 2019 on itax .The same showed that for the years under investigation the total amount of taxes declared was Kshs 3, 761,061,the total amount of taxes paid was Kshs 4,895,317 and the total variance of taxes was Kshs 1,134,256. This showed that the Appellant had filed its returns consistently over the years under review and paid the self-assessments taxes.

32. That for VAT3 return, the Appellant had been filing returns consistently whereby the total amount of VAT declared Kshs 1,081,269. 00 and the total amount of VAT paid being Kshs 3,002,492. 00.

33. That for PAYE the years 2015-2019, one of the three directors, Kudlip Singh was the only one on payroll of the company. For 2020, all the three directors were on payroll. The total cash paid to the directors were significantly understated, considering the director's lifestyle and their drawings made from the company.

34. That the total income declared for Kuldip Singh was Kshs 831, 760. 00, the self-assessed taxes were Kshs 2,789. 00 and the amount paid was Kshs 3,749. 00. The total income declared for Kiranjeet Kanur was Kshs 1,312,800. 00, the self-assessed taxes were Kshs 51,321 and the total amount paid was Kshs 51,321. 00.

35. That the total income declared for Jasrai Singh Sagoo was Kshs 820,783. 00, the self-assessed taxes were Kshs 45,440. 00 and the amount paid was Kshs 73,007. 00. That this showed that the income declared and taxes paid were not reflective of the bank deposits the directors received.

36. That the Appellant being aggrieved by the Respondent's decision for additional assessments dated 18th May, 2022 subsequently filed this Appeal.

Respondent’s Prayers 37. That the Respondent prayed that this Honourable Tribunal do find:-a.That the Appellant’s notice of objection is invalidb.That the taxes are due and payablec.Appeal be dismissed

ISSUES FOR DETERMINATION 38. The Tribunal having evaluated the pleadings and submissions of the parties is of the view that there is one issue that calls for its determination;Whether there is a valid appeal before the Tribunal

Analysis And Findings 39. The Tribunal having determined the issue falling for its determination proceeded to analyse them as hereunder.

Whether There Is A Valid Appeal Before The Tribunal 40. The Appellants averred that on 25th October 2021, the Respondent issued the Appellants with the findings from the just concluded compliance verification which resulted to tax liability amounting to Kshs. 110,355,823. 00 arising from alleged significant under declaration of income in the Appellant VAT and income tax returns.

41. The Appellant posited that on 23rd December 2021 and 24th December 2021, the Respondent served the Appellant with additional assessments demanding tax liability totaling to Kshs. 26,889,532. 70/- inclusive of interest.

42. The Appellant averred that on 6th December 2021, the Appellant lodged a notice of objection to the additional tax assessment demanding Kshs. 110,335,823. 00 stating that the withholding tax on management and professional fees was erroneous, withholding tax on deemed interest were inaccurate and the fringe benefit tax calculations were not correct. The said objection further particularized the Appellants’ objections as follows;a.That the directors of the 1st Appellant have complied in meeting its tax obligation from the year 2015 – 2020b.That the computation of the schedule on the demand letter dated 25th October 2021 was not based on actual assessment of records.c.That the directors of the company never engaged in any tax fraud as alleged in the demand letterd.That all money transactions by the directors of the company can be well explained in detail and there are sufficient records to that effect.e.That the Respondent’s findings and the decision that tax offences were committed by the Appellants were based on limited information.

43. The Appellant averred that on 16th February 2022 and 8th March 2022, the Respondent issued Late Objection Validity Application letters asking for evidence to support the late objections with 7 days from the date of the letter in question. The Respondent deemed their findings to compliance verification dated 25th October 2021 as the tax assessment that was being objected.

44. The Appellant averred that it responded to the late objection application Validity letter asserting that the Respondent’s letter dated 25th October 2021 was a compliance verification letter not an assessment, the letter did not meet all the requirements in accordance to Section 31 (8)- of the Tax Procedure Act. The Appellant further submitted that all the assessments originating from the compliance verification findings that were raised were objected to in time. The Appellant further averred that it requested the Respondent to work on the letter dated 25th October 2021 and update their records.

45. The Appellants averred that Respondent deemed their findings to compliance verification dated 25th October 2021 as tax assessment that was being objected to and went ahead to issue the Appellants with a late Objection Application Validity letter asking for evidence to support the late objection within 7 days from the date of the letter in question.

46. The Respondent averred that the Appellant objected to the assessment but did not comply with the mandatory provisions of Section 51(3). The Section states that:-“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2)if-(a)the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;(b)in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1);and(c)all the relevant documents relating to the objection have been submitted.”

47. The Respondent submitted that the Appellants had not been issued with an appealable decision for the Appellant to file an appeal against.

48. The Respondent argued that where an objection has been invalidated by the Commissioner for want of compliance with the mandatory provisions of Section 51, the Appellant's recourse would be to validate the objection by providing documents to the Commissioner to aid the Commissioner in considering the Appellant's objection and issuing an objection decision which would then be the appealable decision.

49. The Tribunal is guided by the Supreme Court in Samuel Kamau Macharia & Another V Kenya Commercial Bank Limited & 2 Others, which stated that a Court can only exercise that jurisdiction that has been donated to it by either the Constitution or legislation or both.

50. The Tribunal finds that the letters to the Appellant from the Respondent dated 25th October 2021 and 6th January 2022 were Tax investigations findings for years of income 2015-2020 and a demand notice for tax in arrears respectively. These letters could not, and did not amount to a decion by the Commissioner as is envisaged in Section 51(8) of the TPA.

51. The effect of this finding is that the Appellants appeal was premature, as it was filed before exhausting the statutory dispute resolution mechanism provided in the TPA. At the very least it should have waited for the Respondent to issue a decision in regarding this dispute prior to the filing of this Appeal.

52. Flowing from the foregoing the Tribunal finds that this Appeal is premature and lacks merit.

Final Decision 47. In view of the foregoing, the Tribunal finds that the Appeal is incompetent and accordingly makes the following Orders;a.That the Appeal is hereby struck out.b)Each Party to bear its own cost.

55. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF NOVEMBER, 2023ERIC NYONGESA WAFULA.............CHAIRMANCYNTHIA B. MAYAKA...........................MEMBERDR RODNEY OLUOCH...........................MEMBEREUNICE NG’ANG’A.................................MEMBERABRAHAM K. KIPROTICH...................MEMBERBERNADETTE GITARI...........................MEMBER