[2024] KETAT 19 (KLR)

Sandalwood Hotels & Resort Limited v Commissioner of Domestic Taxes (Tribunal Appeal 1075 of 2022) [2024] KETAT 19 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 19 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal 1075 of 2022

Grace Mukuha, Chair, E Komolo, Jephthah Njagi, T Vikiru & G Ogaga, Members

January 26, 2024

Between

Sandalwood Hotels & Resort Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company incorporated on 5th July 2008. The company runs the hotel Sandalwood located in Kitengela, Kajiado county.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act and is responsible for the administration and enforcement of various revenue laws among them Income Tax Act and VAT Act.

3. The Respondent issued additional income tax and VAT assessments for the period January 2017 to December 2021 for Kshs. 10,617,388. 00 on 11th February 2022 manually and 13th May 2022 on iTax.

4. The Appellant lodged an objection to the additional assessments on 27th May 2022.

5. The Respondent issued an objection decision on 30th August 2022 confirming the additional assessments on VAT and income tax for Kshs. 11,018,030. 00.

6. Aggrieved by the decision of the Respondent, the Appellant filed this Appeal through a Notice of Appeal dated 27th September 2022.

The Appeal 7. The Appeal is premised on the Memorandum of Appeal dated 27th September 2022 and filed on 28th September 2022 raising the following grounds: -a.That the Respondent erred in law and in fact by arbitrarily arriving at the conclusion that the assessments raised on the Appellant were proper and consistent without according any consideration to the Appellant's documents.b.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 Actions Act and Article 47 of The Constitution of Kenya.c.That the Respondent's objection decision is deficient of the mandatory qualities of an objection decision as prescribed in Section 51(10) of the Tax Procedures Act as it neither discloses any substantive finding relating to the documents provided nor does present a finding on the material facts.d.That the Appellant effectively discharged its onus of proof as imposed on it by Section 56(1) of the Tax Procedures Act as the documents furnished by it during the review of the objection application were sufficient to enable the Respondent to effectively review the objection application.

Appellant’s Case 8. The Appellant’s case is also premised on the following documents:a.Its Statement of Facts dated 27th September 2022 and filed on 28th September 2022 and the documents attached thereto; andb.Its Written Submissions dated 20th June 2023 and filed on 21st June 2023.

9. The Appellant averred that the Respondent pursuant to its statutory mandate under Section 5 of the KRA Act and in exercise of its authority under Section 31(1) of the TPA, amended the Appellant's self-assessment for 2017 to 2021 tax period with the effect of imposing an added Value Added Tax (VAT) liability of Kshs. 8,208,259 and an income tax liability of Kshs. 2,409,129. 00.

10. That this was on account of the Respondent bringing to tax the supposed variances discovered in the VAT and income tax returns.

11. The Appellant submitted that the focal issue for determination in this Appeal is whether the Respondent erred in confirming the assessments raised on the Appellant and whether the Respondent accorded a fair hearing to the Appellant.

12. That the Respondent's case as elicited from the objection letter is pivoted on the alleged deficiency in the evidence provided by the Appellant in an attempt to justify the variances.

13. The Appellant submitted that the Respondent erred in law and in fact by arbitrarily arriving at the conclusion that the assessments raised on the Appellant were proper and consistent without according any consideration to the Appellant's documents.

14. That the Respondent did not provide any legal basis of arriving at its conclusion but relied on the generality of there being no sufficient documents to enable a review of the objection application.

15. The Appellant submitted that its right to a fair hearing as enshrined in the Fair Administrative Actions Act and the Constitution of Kenya 2010 was curtailed.

16. That the Respondent infringed on the Appellant's rights to a fair administrative action as enshrined in Section 4(3) (b) and 4(4) (b) of the Fair Administrative Actions Act and Article 47 of the Constitution when it did not accord the taxpayer a fair opportunity to prosecute its objection application as the timelines within which the documents were required to have been provided were not in the least practical.

17. The Appellant submitted that the Respondent's objection decision was deficient of the mandatory qualities of an objection decision as prescribed in the Tax Procedures Act.

18. That the Respondent's letter invalidating the objection application was deficient of the model qualities of an objection decision espoused in Section 51(10) of the Tax Procedures Act.

19. That this Section states that an objection application should contain "a statement of findings on the material facts and the reasons for the decision."

20. That the Respondent's basis of confirming the assessments was general and devoid of any legal or accounting rationale.

21. The Appellant submitted that it effectively discharged its onus of proof as imposed on it by Section 56(1) of the Tax Procedures Act.

22. That the Appellant facilitated the production of all the necessary evidence required to authenticate the purchases made by it.

23. That the Appellant furnished the Respondent with invoices and its financial statements.

24. That from the objection decision rendered, it is clear that no evidence or competing argument was canvassed by the Respondent to negate the Appellant's grounds of objection.

25. That therefore, it is deduced that the Appellant effectively discharged its evidential burden as imposed on it by the Section 56(1) of the Tax Procedures Act.

26. The Appellant further submitted that the Respondent's decision of 30th August 2022 is an affront to justice and as a consequence, the Appeal ought to be allowed.

Appellant’s Prayers. 27. The Appellant made the following prayers to the Tribunal: -a.To set aside the objection decision.b.That the costs of this Appeal be awarded to the Appellant.

Respondent’s Case 28. The Respondent’s case is premised on the following documents filed with the Tribunal:a.The Respondent’s Statement of Facts dated 26th October 2022 and filed on 27th October 2022 together with the documents attached thereto.b.The Respondent’s Written Submissions dated 5th June 2023 and filed on the same date.c.The Respondent’s Supplementary Submissions dated 23rd June 2023 and filed on 26th June 2023 together with the authority attached thereto.

29. In response to the Appeal, the Respondent reiterated its position as stated in the confirmation of assessment communicated to the Appellant.

30. In response to ground 1 contained in the Memorandum of Appeal, the Respondent averred that during the objection process, it requested for various documents from the Appellant to support the grounds of objection. The documents included the following:-a.Proof of payment and/ or supplied statements for disallowed invoices.b.General ledgers for the period 2017 to 2021. c.Supporting documentation for wear and tear allowance.d.Reconciliation for charged variances.e.Corrected financial statements.

31. The Respondent averred that the Appellant only provided documents on purchases invoices and audited accounts alleged to be erroneous. That the documents provided by the Appellant did not address the Appellant's grounds of objection leading to the Respondent to confirm the assessments.

32. That Section 17 of the VAT Act on credit for input tax against output tax states that:“(2)If, at the time when a deduction for input tax would otherwise be allowable under subsection (1)-a.The person does not hold the ·documentation referred to in subsection (3), orb.the registered supplier has not declared the sales invoice in a return, the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation.”

33. The Respondent averred that one of the basis of the assessment raised was on disallowed expenses for VAT inputs and wear and tear allowances.

34. That the Appellant failed to provide any documentation to support the same leading to the same not being allowed.

35. That in response to ground 2 as contained in the Memorandum of Appeal, it was the Respondent's position that the Appellant was granted fair hearing during the objection process.

36. The Respondent averred that the Appellant was accorded an expeditious, efficient, lawful, reasonable and procedurally fair treatment.

37. That the failure of the Appellant to provide the supporting documents led the Respondent to confirm the assessment raised.

38. In response to ground 3 as contained in the Memorandum of Appeal, the Respondent stated that the objection decision was limited to the documents that the Appellant provided to support its objection.

39. The Respondent averred that as stated earlier, the documents provided by the Appellant were insufficient to warrant a statement of findings.

40. That when requested by the Respondent for various documents to support the grounds for objection, the Appellant submitted only 2 documents which when reviewed by the Respondent were not sufficient to support the grounds of objection or reconcile the variance as assessed.

41. The Respondent averred that Section 51(10) of the Tax Procedures Act states that:“An objection decision shall include a statement of findings on the material facts and the reasons for the decision.”

42. The Respondent submitted that in the objection decision, it clearly pointed out to the Appellant that its objection application was disallowed in full and the additional assessment confirmed due to insufficient documents.

43. In response to ground 4 of the Memorandum of Appeal, the Respondent submitted that Section 24(2) of the Tax Procedure Act states that: -“The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the commissioner”

44. The Respondent submitted that the documents provided by the Appellant were not sufficient to discharge the burden of proof as provided under Section 56 of the TPA. That further the Respondent was not bound by the information provided by the Appellant.

45. The Respondent submitted that the only issue for determination in this matter is:Whether the Respondent erred in the computation and confirming the default assessment?

46. The Respondent submitted that it issued the additional tax assessment in exercising its mandate under Section 31 of the Tax Procedures Act.

47. That according to this Section, the Commissioner may amend an assessment (referred to in this section as the "original assessment"), by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that-“(c)In any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates,”

48. That upon receiving the assessment by the Respondent, it was the Appellant's duty to prove that the Respondent had erred in its assessment.

49. That the additional assessments in issue were raised due to VAT and income tax variances. That these are on the Appellant’s tax declarations which the Respondent assumed to be the true position.

50. The Respondent submitted that in the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR the court stated,'' ... The other important issue to bear in mind is that under our system of self-reporting of tax liability, the taxpayer initially decides the extent and amount of his/her statutory obligation to pay tax. The taxpayer in such cases generally possesses the objective evidence.”

51. The Respondent took issue with the unexplained variances and the Appellant was not able to provide documents to reconcile the variances noted. That the Appellant also failed to provide supporting documents for disallowed expenses for some VAT inputs and for wear and tear allowance.

52. The Respondent submitted that Section 23 (1) (b) of the TPA provides;“A person shall-... (b) maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained.”

53. That also, Section 54A(1) of the Income Tax Act provides that: -“A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.”

54. The Respondent also submitted that Section 56(1) of the Tax Procedures Act provides that;-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

55. The Respondent submitted that the above provisions place an obligation on any taxpayer to ensure any and all tax documents required for scrutiny be readily available for the Respondent. That Section 23(1) (b) demands that taxpayers maintain the tax documents.

56. The Respondent submitted that the justification for placing the burden upon the taxpayer and not the Authority has been enumerated in various judgments. That in the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR, the court in describing why the burden of proof falls on the taxpayer, stated: -“... The shifting of the burden of proof in tax disputes flows from the presumption of correctness which attaches to the Commissioner's assessments or determinations of deficiency. The commissioner's determinations of tax deficiencies are presumptively correct. Although the presumption created by the above provisions is not evidence in itself, the presumption remains until the taxpayer produces competent and relevant evidence to support his position. If the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented, with the burden of proof on the taxpayer. The other important issue to bear in mind is that under our system of self-reporting of tax liability, the taxpayer initially decides the extent and amount of his/her statutory obligation to pay tax. The taxpayer in such cases generally possesses the objective evidence. Certainly, with the exception of filed returns and information provided by the taxpayer, the Revenue authority is in a poor position to establish an affirmative case ... "

57. The Respondent submitted that since the Appellant did not establish that there was any error in the Respondent's additional assessment, the assessment and objection decision were both right in law.

Respondent’s prayers 58. The Respondent made the following prayers to the Tribunal:-a.That the Commissioner’s objection decision of Kshs. 11,018,030. 00 be upheld.b.That this Appeal be dismissed with costs to the Respondent as the same is without merit.

Issues for Determination 59. The Tribunal has considered the facts of the matter and the submissions made by the parties, and identified the following to be the issues for determination in this matter: -a.Whether the Appellant’s objection was allowed by the operation of the law.b.Whether the Respondent erred in fact and in law in confirming the Income Tax and VAT assessments of the Appellant.

Analysis and Findings 60. Having identified the issues that fell for its determination, the Tribunal proceeded to analyze them as hereunder.

61. The genesis of this Appeal is the additional assessments raised by the Respondent based on what the Respondent called variances between the sales as per the VAT returns, and the sales as per the income tax returns.

62. The Respondent stated that the Income tax return indicated a higher figure than that of the VAT returns.

63. The assessments were raised on 13th May 2022 and the Appellant objected to the assessments on 27th May 2022. The Respondent issued its objection decision on 30th August 2022.

64. Aggrieved by the decision of the Respondent, the Appellant filed a Notice of Appeal on 27th September 2022.

65. The Appellant raised the following 4 grounds of Appeal: -a.That the Respondent raised an arbitrary assessment without considering the Appellant’s documents.b.That the Respondent did not provide the Appellant with a fair hearing as enshrined in Article 47 of the Constitution of Kenya 2010. c.That the objection decision issued by the Respondent is deficient as it does not provide the findings on material facts.d.That the Appellant furnished adequate documents during the review and objection and therefore discharged the burden of proof imposed on it by Section 56(1) of the TPA.

66. On the other hand, the Respondent stated that it had requested information from the Appellant and that the Appellant only provided document on purchases invoices and audited accounts alleged to be erroneous. The Respondent further stated that the documents provided by the Appellant did not address the Appellant’s grounds of objection, leading to the Respondent confirming the assessment.

67. The Tribunal notes that while both parties concurred that there was a request for and provision of documents, both parties did not provide evidence to enable the Tribunal to ascertain the dates when this information exchange took place. Based on the foregoing, the Tribunal could only rely on the certain dates that were presented before it, that is, the date the Appellant lodged its notice of objection and the date the Respondent issued its objection decision.

68. In their pleadings, both parties were in agreement on the following facts: -a.That the Respondent issued its assessment for the period January 2017 to December 2021 on 11th February 2022. b.That the Appellant lodged an objection to the assessments on 27th May 2022. c.That the Respondent issued its objection decision on 30th August 2022 confirming the additional assessment.

69. Upon receipt of an objection from a taxpayer, the Tax Procedures Act in Section 51(11) states that: -“The Commissioner shall make the objection decision within sixty days from the date of receipt of-a.The notice of objection; orb.Any further information the Commissioner may require from the taxpayer.failure to which the objection shall be deemed to be allowed.”

70. The Tribunal notes that the Appellant objected to the assessments on 27th May 2022 and the Respondent rendered its objection decision on 30th August 2022. This was over three months after the Appellant objected to the assessment and well beyond the sixty days allowed by Section 51(11) of the TPA.

71. The Tribunal has pronounced itself on the need to adhere to statutory timelines. In TAT 127 of 2020, BIC East Africa Ltd vs Commissioner of Customs & Border Control, the Tribunal held that;“Additionally, the Tribunal finds the Respondent's late response to the review application to be in gross violation of Section 229 (5) of the EACCMA 2004 which stipulates that the where the Respondent had not communicated his or her decision within the specified time of 30 days, the review application shall be deemed to have been allowed by the Respondent. To contextualize this, as of 7th June 2019 the Appellant's review application was deemed allowed meaning that it had not tax liability in the eyes of the law. It also meant that the Appellant was well within its right to apply for a refund of the taxes paid earlier under protest. Our resolve in this regard is further cemented in light of the fact that Section 229 (4) & (5) of the EACCMA are cushioned in mandatory terms, hence the Respondent was not allowed to extend the same timelines. (See Associated Battery Manufacturers limited versus Respondent of Customs Services (TAT Appeal No 1 of 2015).

72. The Courts have also emphasized the need to be bound by the statutory timelines. In Nicholas Kiptoo Arap Korir Salat v IEBC & 6 Others [2013] eKLR, the court held that: -“This Court, indeed all courts, must never provide succor and cover to parties who exhibit scant respect for rules and timelines. Those rules and timelines serve to make the process of judicial adjudication and determination fair, just, certain and even-handed. Courts cannot aid in the bending or circumventing of rules and a shifting of goal posts for, while it may seem to aid one side, it unfairly harms the innocent party who strives to abide by the rules. I apprehend that it is in the even-handed and dispassionate application of rules that courts give assurance that there is a clear method in the manner in which things are done so that outcomes can be anticipated with a measure of confidence, certainty and clarity where issues of rules and their application are concerned…”

73. Further the High Court in emphasizing the strict application of statutory timelines also had this to say in Equity Group Holdings Limited -Vs- Commissioner of Domestic Taxes 2021 (eKLR): -“A statutory edict is not procedural technicality. It’s a law which must be complied with. Parliament in its wisdom expressly and in mandatory terms provided………”

74. In the case of Republic vs Commissioner of Domestic Taxes Ex Parte Fleur Investments Limited [2020] eKLR the Honorable Judge John M. Mativo held that:“I find backing in Republic v Commissioner of Customs Services Ex-Parte Unilever Kenya Limited in which the court stated that if the Commissioner does not render a decision within the stipulated period, the objection is deemed as allowed by operation of the law. The act requires that where the Commissioner has not made an objection within 60 days from the date the tax payer lodged the notice of objection, the decision objection shall be allowed. This means that the issues that the tax payer had raised in the objection will be accepted.”

75. The Tribunal finds that the objection made by the Appellant on 27th May 2022 was allowed by operation of the law and the Respondent’s objection decision conveyed in the letter dated 30th August 2022 is therefore not valid.

76. Having found that the objection by the Appellant was allowed by operation of the law, the Tribunal did not delve into the other issue that fell for its determination as it was rendered moot.

FINAL DECISION 77. The upshot of the foregoing is that the Appeal is merited and consequently the Tribunal makes the following Orders: -a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 30th August 2022 be and is hereby set aside.c.Each party to bear its own costs.

78. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JANUARY, 2024. GRACE MUKUHA - CHAIRPERSONDR ERICK KOMOLO - MEMBERJEPHTHAH NJAGI - MEMBERTIMOTHY VIKIRU - MEMBERGLORIA A. OGAGA - MEMBER