[2024] KETAT 1586 (KLR)

Salan Company Limited v Commissioner of Legal Services and Board Co-ordination (Appeal E957 of 2023) [2024] KETAT 1586 (KLR) (11 October 2024) (Judgment)

Neutral citation: [2024] KETAT 1586 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal E957 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, G Ogaga & AK Kiprotich, Members

October 11, 2024

Between

Salan Company Limited

Appellant

and

Commissioner of Legal Services and Board Co-ordination

Respondent

Judgment

Background 1. The Appellant is a limited liability company registered in Kenya and incorporated under the Companies Act (Cap 486) and deals in construction.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act. The Kenya Revenue Authority is an agency of the Government of Kenya mandated with the duty of collection and receipting of all tax revenue, and the administration and enforcement of all tax laws set out in Parts 1& 2 of the First Schedule to the Act, for purposes of assessing, collecting, and accounting for all tax revenues in accordance with those laws.

3. The dispute in this Appeal arose when the Respondent carried out an audit on the tax affairs of the Appellant resulting in the issuance of default amended assessment on income tax and VAT totalling Kshs 125,711,111. 00 vide a letter dated 19th January 2022.

4. The Appellant filed a late objection to the default assessment which was dated 18th October 2023.

5. A decision on the objection application was issued by the Respondent vide a letter dated 30th October 2023.

6. Aggrieved by the Respondent’s decision, the Appellant lodged at the Tribunal a Notice of Appeal dated dated 28th November 2023 and filed on 29th November 2023.

The Appeal 7. The Appellant premised its Appeal on its Memorandum of Appeal dated 19th December 2023 and filed on 20th December 2023 and which raised the following grounds of appeal:a.That the Respondent erred in law and fact by considering the Appellant’s application under Section 51(3) of the Tax Procedures Act, instead of considering the Appellant’s application under Section 51(6), 51(7) and Section 51(7A) of the Tax Procedures Act, 2015. b.That the Respondent erred in law and fact by demanding the payment of taxes assessed by issuing a notice under Section 51(4) of the Tax Procedures Act, 2015 as opposed to issuing a bonafide tax decision as prescribed under Section 51(7A).c.That the Respondent erred in law by curtailing the Appellant’s right to a fair hearing as enshrined in Section 4(3)(b) and 4(4)(b) of the Fair Administrative Action Act and Article 47 of the Constitution of Kenya.d.That the Respondent erred in law and fact by failing to consider the Appellant’s ground for late Objection on merit.e.That the Respondent erred in law and fact by failing to give the Appellant a statement of findings on the material facts and the reasons for the decision pursuant to Section 51(10) of the TPA.f.That the Respondent erred in law and fact by failing to credit input against the output tax in violation of Section 17 of Value Added Tax Act, 2013. g.That the Respondent erred in law in imposing penalties and interest on Withholding VAT yet there was no amount due or outstanding since the suppliers paid the principal VAT demanded; andh.That the Respondent erred in law and fact by disregarding the supporting information and documents provided by the Appellant in making its decision.

Appellant’s Case 8. The Appellant set out its case in its Statement of Facts dated 19th December 2023 and filed on 20th December, 2023 and Written Submissions dated 5th August 2024 and filed on 8th August, 2024.

9. The Appellant stated that it was issued with notice of intention to issue default assessment via email dated 19th January 2023 after which it was served with agency notices dated 12th June 2023 and 13th September 2023 for payment of Kshs 75,453,433. 00

10. That it thereafter applied for waiver of penalties and interests vide its letter dated 29th September 2023.

11. That it was informed at a meeting held on 19th October 2023 that it had been issued with two assessments dated 22nd August 2022 and 13th September 2022 amounting to Kshs 75,453,433. 00.

12. That it was supplied with a copy of the assessment dated 22nd August 2022 but it was not given the one dated 13th September 2022 and that it could also not trace the latter assessment in its iTax portal.

13. The Appellant averred that the Respondent advised it that the assessment had been sent to its e-mailsalancoltd@gmail.com . That it managed to access the said assessment after resetting its email.

14. The Appellant lodged an application for late objection against the assessments on 19th October, 2023 on grounds that it had not received any communication from the Commissioner regarding the assessment raised.

15. The Appellant further submitted that it did not unreasonably delay in lodging the notice of objection.

16. That instead of issuing it with a bona fide tax decision as prescribed under Section 51(7A) of the Tax Procedure Act, the Respondent issued the Appellant with a notice under Section 51(4) of the Tax Procedures Act, demanding the payment of the taxes assessed and dated 30th October 2023.

17. The Appellant averred that its rights under the fair administrative action as enshrined in Section 4(3)(b) and 4(4)(b) of the Fair Administrative Action Act and Article 47 of the Constitution were infringed on by the Respondent to the extent that it demanded tax without following the legally laid down procedures under Section 51 of the Tax Procedures Act.

18. That having lodged a valid notice of late objection, in accordance with Section 51(6) of the TPA, the Respondent was similarly obliged to consider the same on merit.

19. It submitted that the Respondent’s invalidation decision contained in its letter 30th October, 2024 was a decision issued pursuant to Section 51(1) and 51(2) of the Tax Procedures Act for normal objections or objections that are filled by taxpayers within time and not applications for late objection made under Section 51(6) of the Tax Procedures Act.

20. That the Respondent’s failure to consider its application for extension of time to lodge a notice of objection and the reasons advanced therein contravened Section 51(7A) of the TPA and Article 47 of the Constitution.

21. That the Respondent ought to have informed it that its application was not validly lodged and advised it to validate it under Section 51(4) of the TPA. That this was not done within seven days after the date of the notice.

22. It argued that the Respondent’s failure to consider its application for late Objection contravened Section 51(4) and 51(7A) of the Tax Procedures Act, 2015, Sections 4(3)(b) and 4(4)(b) of the Fair Administrative Action Act and Article 47 of the Constitution. It supported its position with the cases of:a.Nizaba International trading Company limited vs Kenya Revenue Authority [200] eKLR,b.Kenya Medical association Housing Cooperative society Limited v attorney General & Another [2016] eKLR.c.Republic v Kenya Revenue Authority ex-parte Amsco Kenya Limited [2014] eKLR.d.Kenya Medical association Housing Cooperative Society limited v Attorney General & another [2016] eKLR.e.Republic v Firearms Licensing Board & another Ex Parte Boniface Mwaura [2019] eKLR.

23. The Appellant submitted that the Respondent had acted in a manner that is procedurally unfair and in contravention of the law.

Appellant’s prayers 24. In light of the above submissions, the Appellant prayed to the Tribunal for orders that:a.The Appeal be allowed;b.The Respondent’s decision as contained in its letter dated 30th October, 2023 be set aside in its entirety;c.That the principal tax and attendant penalties and interest demanded by the Respondent amounting to Kshs 75,453,433. 00 vide its decision as contained in its letter dated 30th October, 2023 be vacated forthwith in their entirety;d.The costs of and incidental to this Appeal be awarded; ande.Any other orders that the Tribunal may deem fit.

Respondent’s Case 25. The Respondent’s case is premised on its Statement of Facts dated 9th February 2023 and filed on 12th February, 2024 and Written Submissions dated and filed on 12th August 2024.

26. The Respondent stated that it issued the Appellant with a Notice to issue default and amended assessments as per Sections 29 and 31 of the Tax Procedures Act on 19th January 2022.

27. That the Appellant filed a late objection notice dated 18th October 2023 which it received and acknowledged on 19th October 2023.

28. That on 24th October 2023, the Appellant was issued with an objection acceptance letter and was advised to lodge a valid objection with objection grounds, evidence supporting the grounds and expected amendments to be done. That the Appellant failed to lodge a valid objection despite the Respondent’s request for valid grounds of objection and evidence to support the objection application.

29. The Respondent averred that the Appellant ought to have validated its objection by providing the documentations requested in accordance with Section 51 (3) of the Tax Procedures Act.

30. The Respondent asserted that the assessments were correctly issued and conformed to the law and that the Appellant did not provide any evidence that would have altered the tax assessment.

31. That Section 56(1) of the TPA places the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving at a different objection decision.

32. The Respondent identified the following issues for determination:i.Whether there is a valid objectionii.Whether the Appellant’s right to fair hearing was violated by the Respondent.iii.Whether the Respondent was in violation of Section 51(4) and Section 51(7A) of the Tax Procedures Act.iv.Whether the Appellant has discharged his burden of proof.

33. The identified issues were discussed as follows:

i.Whether there is a valid objection. 34. The Respondent stated that from the Appellant’s own documents filed at the Tribunal, the email correspondences to the company was also copied to the directors and other company employees through their email address being kanur@live.com,vissack.yussuf@yahoo.com, christopherkibaki.ndoro@sc.com,piusohiambo.owino:sc.com,felixnyachio.nyabuto@sc.com, evelynwanjiru.gachanja@sc.com, kahiyemaalim@gmail.com, and this was communicated as far back as 2022.

35. That further the assessments were uploaded in the Appellant’s iTax portal on 22nd August 2022 but the Appellant deliberately chose to ignore the assessments instead of filing an objection with the Commissioner.

36. That the Appellant did not bother to change its credentials and as such its reasons for failure to file the objection in time or that it could not access its assessments was flimsy. That this explains the reason why it quickly accessed its iTax portal after it was issued with agency notice.

37. That the Appellant’s request for a late objection notice was therefore unreasonably late, without reason and it ought to have been validated by providing the documentations requested by the Respondent and in accordance to Section 51 (3) of the tax Procedures Act.

38. That upon failure by the Appellant to validate its objection, the Respondent issued the decision dated 30th October 2023 invalidating the Appellant’s objection for want of compliance with Section 51(3) of the tax procedure Act, 2015.

ii.Whether the Respondent was in violation of Section 51(4) and Section 51(7A) of the Tax Procedures Act. 39. The Respondent contended that it gave the Appellant a fair hearing but the Appellant failed to comply and it thus had no option but to invalidate the objection.

40. That the Appellant did not demonstrate how its rights under Section 51 of the TPA was violated and prejudiced.

iii.Whether the Respondent was in violation of Section 51(4) and Section 51(7A) of the Tax Procedures Act. 41. The Respondent stated that it did not violate Section 51(4) and 51(7A) of the TPA.

42. That the Appellant had a duty to file its objection within days as prescribed in Sections 51 (1) and 51 (2) of the TPA.

43. That the application for late objection was considered and found wanting and hence invalidated and consequently the Appellant cannot benefit from the magnanimity of Sections 51(6), 51(7) and (7A) of the TPA.

44. That the Tax Procedures Act does not stipulate how much time the Commissioner should take in considering an application for leave to object out of time but in the interest of fair administration, it should render the same within reasonable time.

45. That it rendered the decision on 30th October 2023 which was about 6 weeks from the time of application and that cannot be considered to be unreasonable time and hence not in violation of the Appellant’s right to fair administration.

iv. Whether the Appellant has discharged its burden of proof. 46. The Respondent averred that the Appellant failed to discharge its burden of proof under Section 56 of the TPA. That in the absence of supporting documents it thus had no option but to invalidate the objection.

47. The Respondent supported its case with the following decisions:a.HCITA No. 121 of 2021: Commissioner of Domestic taxes vs. Metoxide Africa Ltd.b.Republic v Kenya Revenue Authority; Proto Energy Limited (Exparte) (Judicial Review Application E023 of 2021) [2022] KEHC 5 (KHR) (24 January 2022) (Judgment).c.Tumaini Distributors Company (K) Limited vs. Commissioner of Domestic taxes [2020] eKLR.

48. That in this particular instance, the Appellant did not produce sufficient evidence to discharge its burden or to shift the burden to the Commissioner. That its assessment was thus correct.

Respondent’s Prayers 49. The Respondent prayed that this Tribunal considers the case and finds that:a.That the Appellant’s Appeal is premature and is a waste of court’s time.b.The confirmed assessments disallowing input VAT were proper in law.c.That the Appeal herein be dismissed with cost to the Respondent.

Issues for Determination 50. The Tribunal has considered the Memorandum of Appeal, the parties' Statements of Facts and Written Submissions on record. It is thus of the view that the issue falling for its determination is whether the Respondent’s decision dated 30th October 2023 is lawful.

Analysis and Determination. 51. The Appellant argued that the Respondent’s invalidation decision contained in its letter 30th October, 2024 was a decision issued pursuant to Section 51(1) and 51(2) of the Tax Procedures Act for objections or objections that are filed by taxpayers within time and not applications for late objection made under Section 51(6) of the Tax Procedures Act. It was its view that the said decision was not only issued late contrary to Section 51(7A) of the TPA but that it was also an affront on its rights under Sections 51(4) and 51(7A) of the Tax Procedures Act, 2015, Sections 4(3)(b) and 4(4)(b) of the Fair Administrative Action Act and Article 47 of the Constitution.

52. The Respondent on its part argued that the Appellant had failed to validate its late objection with support of relevant documents and hence its decision to confirm the assessment when the Appellant failed to comply with Section 51(3) of the TPA. It was also its view that the Commissioner is not bound by timelines when considering an application for leave to file appeal out of time. That its decision that was rendered about 6 weeks after receiving the application was done within reasonable time.

53. The Respondent alleged that it had issued an objection acceptance letter on 24th October 2023 where it advised the Appellant to lodge a valid objection with objection grounds, evidence supporting the grounds and expected amendments to be done. This letter was not tabled before the Tribunal to support the said assertions. The said letter shall thus be held to be non-existent and the Tribunal shall focus on the letter dated 30th October 2023 which is the subject of this Appeal.

54. Section 51(7A) of the TPA provides thus regarding the Respondent’s duty to respond to an application for leave to file a late notice of objection:“The Commissioner shall notify the taxpayer of the decision made under subsection (14) within fourteen days after receipt of the application.”

55. While Section 51(7A) of the TPA is clear that a decision on an application for leave to file an objection out of time must be considered and a decision issued thereof within 14 days. The law has not provided what happens in case of default. This is a big lacuna more so considering that such applications are never accompanied with the objection notice itself, which would be the document that would help trigger the process of obtaining an objection decision on a tax assessment that is contested by a taxpayer.

56. The Appellant’s application for late objection dated 18th October 2023 was stamped as having been received by the Respondent on the 19th October 2023. The Respondent was thus required to issue its decision thereof by 2nd November 2023. There was no evidence on record that this was done.

57. The Respondent’s decision to proceed with execution proceedings or what it referred to as an “immediate demand of notice of tax arrears” was an action that was not known to the law.

58. Its decision to issue execution proceedings which was more or less a tax demand meant that it had jumped the gun and disregarded the mandatory procedure that is laid down in law requiring it to issue a decision on the application within 14 days before proceeding to invoke the enforcement measures contained in law.

59. The wording of the law under Section 51(7A) of the TPA is couched in mandatory terms using the word ‘shall’. This thus mean that the Respondent did not have the discretion, liberty or right to ignore this provision of the law by going to the next stage of enforcement or demand of taxes when the application for leave to file appeal out of time was still pending.

60. The connotation and consequence of the use of the word ‘shall’ was discussed in Rongai Tiles & Sanitary Wares Limited v Commissioner of Domestic Taxes (Tax Appeal E011 of 2020) [2023] KEHC 18546 (KLR) (Commercial and Tax) (16 June 2023) (Judgment) where it was held thus:“The use of the words “shall” and “and” connote the mandatory and conjunctive nature of the aforementioned requirements, meaning that a tax payer must satisfy all of them for an objection to be deemed as validly lodged.”

61. Similarly in this case, the Respondent was required to satisfy the requirement and duty placed on it under Section 51(7A) of the TPA before it could be allowed to demand and enforce the payment of the assessed taxes as if they were legally due. That being the law, the Respondent is obliged to comply with it, however inconvenient it maybe.

62. The law directly prohibited it from skipping the rigour of Section 51(7A) of the TPA by proceeding to demand for the assessed taxes like it has done in this case. Its action was thus illegal.

63. Accordingly, the Tribunal holds and finds that whereas the Respondent’s decision was made under tax law the said execution proceedings dated 30th October 2023 was unlawful.

Final Decision 64. The upshot to the foregoing analysis is that the Tribunal finds and holds that the Appeal is merited and consequently makes the following orders: -a.The Appeal be and is hereby allowed;b.The Respondent’s execution proceedings dated 30th October 2023 be and is hereby set aside.c.The Respondent is hereby directed to issue it decision on the Appellant’s application to file its notice of objection out of time and dated 18th October 2023 within 14 days from the date of delivery of this judgment.d.In default of the Respondent complying with Order No. (c) above, then the Appellant’s objection application will be deemed to have been allowed.e.Each party is to bear its own costs.

65. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 11TH DAY OF OCTOBER, 2024ERIC NYONGESA WAFULACHAIRMANCYNTHIA B. MAYAKA DR. RODNEY O. OLUOCHMEMBER MEMBERGLORIA A. OGAGA ABRAHAM K. KIPROTICH MEMBER MEMBER