[2023] KETAT 539 (KLR)

Shamji Kalyan Pindoria Limited v Commissioner of Investigations and Enforcement (Tax Appeal 944 of 2022) [2023] KETAT 539 (KLR) (18 August 2023) (Judgment)

Neutral citation: [2023] KETAT 539 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 944 of 2022

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, AM Diriye & SS Ololchike, Members

August 18, 2023

Between

Shamji Kalyan Pindoria Limited

Appellant

and

Commissioner of Investigations and Enforcement

Respondent

Judgment

Background 1. The Appellant is a private limited company incorporated in Kenya whose principal business activity is the provision of commercial rental services and the running of a primary and secondary education in Kenya.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act. Under Section 5(1) of the Act, the Respondent 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), it 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 revenue in accordance with those laws.

3. The Respondent carried out investigations against the Appellant covering the period between January 2015 and December 2019 for the tax heads of Corporation tax, Value Added Tax (VAT) and Pay As You Earn (PAYE). Vide a letter dated 8th June 2021, the Respondent communicated the preliminary investigation findings, which established tax indicated to be due of Kshs 321, 932, 080. 00.

4. The Appellant disputed these findings and provided further documentation vide its letter dated 15th June 2021. The Respondent considered the documentation and vide its letter dated 22nd April 2022, demanded a revised tax of Kshs 280,079,396. 00 being Corporation tax and stamp duty, inclusive of penalties and interest.

5. The Appellant objected to this demand by lodging its notice of objection dated 19th May, 2022 and providing documentation and further information to support its objection.

6. The Respondent reviewed the Appellant‟s objection and subsequently issued its Objection Decision vide its letter dated 21st July 2022 and confirmed a principal tax liability of Kshs 274,158,712. 00.

7. Aggrieved by the Respondent‟s decision the Appellant lodged its Notice of Appeal dated 19th August 2022 and filed on even date.

The Appeal 8. The Appeal is premised on the Appellant‟s Memorandum of Appeal dated and filed on 1st September, 2022 stating the following as its grounds of Appeal:a.That the Respondent erred in law and in fact by, ultra vires issuing its objection decision outside the stipulated sixty (60) days from receipt of the Appellant‟s objection in line with Section 51(11) of the Tax Procedures Act.b.That the Respondent erred in law and in fact by ultra vires issuing its Objection decision, contrary to Section 51 (11) of the Tax Procedures Act (TPA) which was received by the Appellant on 22nd July 2022 whereas it was obligated to issue the same on the Appellant before 18th July, 2022. The Objection Decision is therefore null and void ab initio.c.That the Respondent erred in law and in fact by ultra vires issuing a late Objection decision, contrary to Section 51 (11) of the TPA and failed to consider that the Appellant‟s objection must be deemed allowed when it failed to make its decision or any other communication within the statutory sixty (60) days window.d.That the Respondent erred in law and fact by rendering its Objection decision by failing to consider all the fifty nine (59) reasons in its objection and only making a generalized Objection decision, which decision failed to include a detailed statement of its findings on the material facts and reasons for the decision contrary to Section 51(10) of the Tax Procedures Act.e.That the Respondent erred in law and fact through its Objection decision that found that the Appellant is required to pay an additional tax of Kshs 274, 158, 712. 00 (principal taxes due) by ignoring the Appellant‟s submissions throughout the audit, which included the interviews, review meetings, site inspections, document verification meetings, submissions of all supporting documents, interviews of tenants, interviews of suppliers and interview of workmen.f.That the Respondent erred in law and in fact by failing to acknowledge that the Appellant had over paid its taxes as at 31st December 2014 to the tune of Kshs 24,217, 150. 70. 00. g.That the Respondent erred in law and in fact by failing to consider Section 3 (2) (a) (iii) of the Income Tax Act. The Appellant relies on Section 6 & 15 of the Income Tax Act in ascertaining the taxable income and declaring such tax computed thereon. The Respondent disregarded the fact: - a. Rental Income and VATi.That it ought to be guided by the provisions of the law that stipulate that the rental income is taxed on receipt. It stipulates that:“(1)For the purposes of Section 3(2) (a) (III) of the Act, gains or profits shall include any royalty, rent, premium or similar consideration received for the use or occupation of property.”ii.That it ought to be guided by the provisions of the law that stipulate that rental income is taxed upon receipt and not based on expected rental income. The Appellant provided tenancy agreements, rent receipts, rent schedules, audited accounts and interview opportunities to guide the Respondent on the correct/actual income received.iii.That the Appellant has two sources of income, school fees and rental income (commercial), and the Respondent has assumed that the entire alleged understated income constitutes vatable sales and has therefore assumed the alleged understated income is understated vatable rental income.iv.That contrary to the information provided by the Appellant, the Respondent went ahead and re-computed rental income based on estimated rental income in comparison with the actual rental income reported. It is on this basis that the Respondent purported that the variance between the two (total estimated against actual income reported) is understated income.v.That its letter of assessment and subsequent Objection Decision purported to ascertain the Appellant‟s rental income. The Respondent‟s methodology as calculating the “Expected income”, by analysing the funds received in the bank (total bank deposits), without making the necessary adjustments, cannot be used to arrive at expected income due to the following reasons: -a.That the Respondent ought to have excluded the refundable rent security deposits by the Appellant „s tenants amounting to a total of Kshs 19,866,120. 00. Such monies are equivalent to a quarter year (3 months equivalent) of the monthly rent payable as provided in the tenancy lease agreements.b.That the Respondent ought to have excluded the director‟s shareholder‟s and related companies‟ deposits amounting to a total of Kshs 869,641,690. 00. The Respondent should NOT charge corporate tax on the director, shareholders and related parties loan. The funds were purposed to be used towards the Appellant‟s ongoing development of a housing project.c.That the Respondent ought to have excluded the re-banked and bounced cheques amounting to a total of Kshs 11,115,329. 00. d.That the Respondent ought to have excluded the fixed deposits moved to the current accounts upon maturity and which sum amounted to a total of Kshs 35,866,636. 00. e.That the Respondent ought to have excluded the cash deposited to the bank account which sums were a part of the income received in cash and were already property declared in its financial statements. The Appellant received a total of Kshs 34, 516,950/= as income in cash and banked Kshs 1,400,000 from the same.f.That the Respondent ought to have excluded the transfers, which amounts do not constitute an income and amounted to Kshs 22,974,805. 00. g.That the Respondent ought to have excluded the payments received towards an international trip that did not belong to the Appellant and were cost to cost expenses. The same amounted to Kshs 7,501,513. 00. h.That the Respondent ought to have excluded refund of overpaid school fees for its students amounting to Kshs 280,566. 00. i.That the Respondent ought to have considered that the Appellant charges rent on its commercial property quarterly in advance and as such invoices charged for quarters beginning November and December of each year would have its VAT paid in that year but the income prorated up to the end of the accounting period. As such the Appellant would receive advance rents brought forward and carried forward every year amounting to Kshs 26,206,818. 00 and Kshs 26,959,256. 00 respectively.j.That the Respondent failed to consider that the Appellant has two entries for opening debtors and closing debtors which correspond to the Appellant‟s two (2) sources of income, commercial rent and school income. The Respondent failed to consider the debtors and creditors for the school income.k.That the Respondent failed to consider that the Appellant made payments to its suppliers who later refunded the same as the services/goods were not delivered. The refunds amounted to Kshs 2,772,081 over the period.vi.That, had the Respondent considered all the adjustments as indicated in above, it would find that the said funds deposited into the Appellant‟s bank account do not constitute of income. Therefore, both Corporate Tax and VAT cannot be applied in either as alleged by the Respondent.

b. Salaries & Wagesi.That it allowed salaries and wages with reasons that the expenditure was not reported while filing PAYE returns through P10. The salaries and wages not declared on i-Tax was due to the following reasons and that do not meet the threshold of Section 16 of the Income Tax Act:a.That the salaries and wages did not meet the taxable threshold for PAYE deduction. All remuneration paid to such persons are documented via petty cash vouchers and master roll books bearing the signature and thumb prints on payment for the services delivered.b.That the circumstances that led to the Appellant not providing such salaries and wages through electronic means as guided by Section 75(1) (b) of the TPA 2015 are:i.Between January 2015 to July 2015 the PAYE returns were filed through the manual filing system which included the P10 & P11 together with the master roll book.ii.That by their casual nature, remuneration paid to such employees is based on availability of such work at any given time, which is not permanent.iii.Such employees did not have Personal Identification Number (PIN). The P10 returns requires one to declare employees PIN number to enable the employer to submit electronically as a standard procedure. Most of these employees are non-skilled casual employees and have no knowledge on how to handle such electronic tax matters such as i-Tax PIN registration.iv.The Appellant stated that Section 75 (1) (b) of the TPA (Application of electronic tax system) does not prohibit the Appellant from claiming such expenditure incurred while determining taxable income but only gives the Commissioner of income tax authority to dictate by which means the P10 (PAYE returns) will be submitted hence covered under TPA Act 2015. It is therefore not in accordance to Section 15 of the Income Tax Act that the Respondent should disallow salaries and wages actually incurred.c.That in any case it is the Respondent„s responsibility to ensure that it changed its filing system, it was prudent for it to transfer the information from its Legacy system to its i-Tax system.

c. Paye on Housing Benefiti.That the Appellant only offers housing to its teaching staff within its educational facility and the same is provided to meet the requirements of the Basic Education Act and cannot therefore constitute as an employee‟s benefit.ii.The Respondent has computed PAYE due based on an assumption that the number of units that were actually identified at the time of the audit were fully completed and occupied during the year under review without considering that:a.Houses are occupied based on the date which the teacher occupied the residential unit.b.Houses are vacant when a teacher has vacated the residential unit due to factors such as dismissal, resignation, opt out of school residential unit, among others, will determine the number of units occupied during the period under review.c.That the Respondent erred in law and in fact through its Objection decision that the Appellant underdeclared its rental income by Kshs 782,500,646. 00 upon disregarding the Appellant‟s valid supporting documents such as the tenancy agreements, rent receipts, rental schedules, i-Tax rental income returns, fee structure, fee receipts, fee schedules and cheque payments which documents meet the threshold of Section 15 of the Income Tax Act (CAP 470) and Section 54 A of the Income Tax Act (CAP 470).d.That the Respondent erred in law and in fact through its Objection decision that the Appellant under declared its VAT turnover by Kshs 821,166,260. 00 upon disregarding the Appellant‟s valid supporting documents such as the tenancy agreements, rent receipts, rent , rent schedules, i-Tax rental income returns, fee structure, fee receipts, fee schedules and cheque payments which documents meet the threshold of Section 15 of the Income Tax Act (Cap 470) and Section 54A of the Income Tax Act (CAP 470)e.That the Respondent erred in law and in fact through its Objection decision finding that a total of Kshs 869, 641, 690. 00 is a taxable income whereas the said sum were actually funds received from directors, shareholders and related companies and therefore cannot be deemed as a taxable income within the meaning of income as set out in Section 3(2) of the Income Tax Act.f.That the Respondent erred in law and in fact through its Objection decision finding that Kshs 19,866,120. 00 is a taxable income whereas the said sums were actually tenants‟ refundable deposits and not rental income within the meaning of income as set out in Section 3 (2) of the Income Tax Act.g.That the Respondent erred in law and in fact through its Objection decision finding that a total sum of Kshs 1,400,000. 00 was a taxable income whereas the said sums were part of the rent received in cash then later deposited into the bank account and therefore the assessment amounted to a double taxation.h.That the Respondent erred in law and in fact through its Objection decision finding that Kshs 35,866,636. 00 is a taxable income whereas the said sums were the Appellants fixed deposits moved into the current accounts on maturity.i.That the Respondent erred in law and in fact through its Objection decision finding that Kshs 11,115,329. 00 is a taxable income whereas the said sums were the re-banked and bounced cheques in the Appellant‟s bank account.j.That the Respondent erred in law and in fact through its Objection decision finding that Kshs 22,974,805. 00 is a taxable income whereas the said sums were transfers between the Appellant‟s different bank accountsk.That the Respondent erred in law and in fact through its Objection decision finding that Kshs 56,140,224. 00 is a taxable income whereas the said sums were received from its tenants on account of VAT and therefore did not constitute a taxable income.l.That the Respondent erred in law and in fact through its Objection decision finding that Kshs 550,000. 00 is a taxable income whereas the sums were already duly declared under disposal of the Appellant‟s assets.m.That the Respondent erred in law and fact through its Objection decision finding that Kshs 7,501,513. 00 is a taxable income whereas the said sums were part of an international trip for students charged at cost - to-cost.n.That the Respondent erred in law and in fact through its Objection decision finding that Kshs 280,566. 00 is a taxable income whereas the said sums were refunds for over paid fees, refunded to the Appellant‟s student.o.That the Respondent erred in law and in fact through its Objection decision finding that Kshs 2,772,081. 00 is a taxable income whereas the said sums were refunds from suppliers on goods/services not delivered.p.That the Respondent erred in law and in fact through its Objection decision that disallowed the Appellant‟s salaries and wages costs to the tune of Kshs 23,536,191. 00 upon disregarding the Appellant‟s valid supporting documents such as payment vouchers, salaries and wages schedules, NSSF returns, NHIF returns, master roll books and P11 payment slips, which documents, met the threshold of Section 15 of the Income Tax Act (Cap 470).

The Appellant‟s Prayers 9. The Appellant‟s prayers to the Tribunal are as follows:a.That the Appellant‟s Objection dated 19th May 2022 be upheld and allowed in its entirety.b.That the letter of assessment by the Respondent in the sum of Kshs 274, 158, 712. 00 dated 22nd April 2022 together with any penalties and interest thereon be annulled and set aside in its entirety.c.That the Respondent‟s Objection decision dated 21st July 2022 in the sum of Kshs 274,158,712 together with any penalties and interest thereon be annulled and set aside in its entirety.d.That pending the hearing and determination of this Appeal, there be a stay affecting the implementation of the Objection decision.e.That the Appeal be allowed with costs to the Appellant; andf.That the Honourable Tribunal makes any other order as it deems just and reasonable.

The Respondent‟s Case 10. In its Statement of Facts dated 30th September, 2022 and filed on 3rd October 2022, the Respondent has responded to the Appellant‟s grounds of Appeal and stated as follows:a.In response to grounds a, b and c where the Appellant contended that the Respondent erred in issuing its Objection decision outside the stipulated sixty(60) days, the Respondent relied on Section 51(II) of the TPA and contended that it issued its Objection decision within the statutory period of 60 days on 21st July, 2022 following the Appellant‟s notice of objection dated 19th May, 2022. It stated further that the objection decision contained both facts, the summary of the Appellant‟s objection/grounds and responses thereto it averred therefore that this ground lacked merit.b.In response to ground d where the Appellant contended that the Respondent failed to consider their grounds of Objection, the Respondent averred that it‟s Objection decision contained both facts, the summary of the Appellant‟s objection/grounds and responses thereto. It stated further that it made reference to the tax assessment of 22nd April, 2022 and the Preliminary tax investigation finding which formed the basis of the assessment and subsequent objection decision. The Respondent relied on Section 56 of TPA to place the burden of proof on the Appellant to prove that the Respondent did not take into account its grounds of objection.c.In response to ground e where the Appellant contended that the Respondent erred in finding the Appellant liable for the payment of additional taxes, it averred that it considered all the Appellant‟s submissions in interviews, review meetings, site supervisions, document verification meetings and documentation provided. It stated further that it is empowered under Section 31 of TPA to amend an assessment from available information and to its best judgement.d.In response to ground f where the Appellant contended that it failed to acknowledge the taxes overpaid by the Appellant, the Respondent stated that the Appellant‟s allegation of overpaid taxes of Kshs 24,217,150. 70 is not supported as the Appellant has not provided any proof to substantiate the same. The Respondent relied on Section 47 of the TPA to argue that the Appellant never applied for a refund for the overpaid taxes and that considering that the allegation was made in 2021 relating to 2014 transactions, it is time barred and thus contra- statute.e.Regarding the Appellant‟s ground g where it contended that the Respondent did not take into account the provisions of Section 3 of the Income Tax Act, on the issue of rental income and VAT, the Respondent averred that in order to determine whether the correct turnover and sales were declared for Income Tax and VAT purposes, it compared the turnover on rental income declared in the income tax returns against the vatable sales declared in the VAT returns and established a variance of Kshs 35,001,975. 00. It also compared the information on VAT from the Jaspsersoft system to the sales declared in the Appellants VAT returns and established that the sales declared by the Appellant were higher than the purchases claimed by its clients by Kshs 82,065,824. 00. This variance was treated as income undeclared and added back to taxable income for the purposes of assessment. The Respondent again relied on Section 56 to place the burden of proof on the Appellant who failed to prove that the tax decision was wrong.f.On the issue of salaries and wages, the Respondent averred that in ascertaining staff costs expensed by the Appellant, it compared gross pay per filed PAYE returns with the salaries and wages in the audited account and disallowed in the computation of income tax liability. It stated further that the Appellant did not provide schedules of employees whose payments are alleged to be below the taxable PAYE threshold and that no other records were provided to demonstrate engagement and payments to these employees. The Respondent asserted that since this allegation had not been supported, its position was that the disallowed staff costs remain in the computation of income tax.g.On the issue of PAYE on housing benefit, the Respondent averred that notwithstanding the Appellant‟s assertion that the Respondent failed to consider occupancy of the staff quarters, no evidence was provided during the objection review to indicate occupancy in the period under review. In the absence of information to substantiate the Appellant‟s claim, the Respondent‟s position was that no adjustments could be made in computation of housing benefit.h.In response to grounds h and i where the Appellant contended that the Respondent erred in holding that it had underdeclared income, the Respondent averred that it had examined all documentation provided by the Appellant in arriving at Kshs 782,500,646. 00 and Kshs 821,166,266. 00. i.In response to ground j of the Appeal, the Respondent states that the amounts proven to have been received from its directors, shareholders and related companies is Kshs 60,590,650. 00 and these amounts were adjusted accordingly in calculating the taxable income as shown in the assessment.j.In response to ground k where the Appellant contended that the Respondent erred in finding that Kshs 19,866,126. 00 was taxable income, the Respondent averred that it noted that the Appellant received a total rent deposits amounting to Kshs 19,121,745. 00 and made the necessary adjustments to the preliminary tax findings and this ground should therefore be dismissed.k.In response to ground l where the Appellant contended that Kshs 1,400,000. 00 were actually part of the rent received in cash and then deposited to the bank account, the Respondent averred that the allegations made by the Appellant were unsupported and therefore the Respondent disallowed the claim and added back the amount to the taxable income for purposes of computing the assessment.l.In response to ground m where the Appellant contended that Kshs 11,115,329. 00 was not taxable income as the said sums were re-banked and bounced cheques, the Respondent averred that despite the Appellant providing a schedule of the adjustments to the bank deposits and corresponding description of bounced/re-banked cheques, the Appellant failed to provide further information highlighting the specific transactions for cheques that bounced or re-banked. The schedules submitted by the Appellant were insufficient since the same was a summary without evidence to support the same.m.In response to ground n, the Respondent reiterated that the Appellant did not provide any evidence to support the alleged transfer and that the documentation that was received by the Respondent was only the bank account statements and schedules with no further information.n.In response to grounds o, p, q, r, s of the Appeal, the Respondent contended that the alleged sums already declared under disposal of the Appellant‟s assets were not proven and hence were disallowed. That notwithstanding, the said issue had not been raised during the assessment and objection review stage and thus in raising the same, the Appellant was introducing new grounds which were never considered.o.In response to the last ground of Appeal where the Appellant contended that the Respondent disregarded its supporting documents, the Respondent averred that in accordance with Section 31 of TPA, it considered all documents provided by the Appellant in support of its notice of objection and made necessary adjustments. It stated further that in ascertaining staff costs expensed by the Appellant, it compared gross pay as per filed PAYE returns with salaries and wages in audited accounts. The resultant variance was disallowed in computation of income tax liability.p.The Respondent therefore prays that the Tribunal finds:a.That the Respondent‟s Objection decision is proper and in conformity with the provisions of the law.b.That this Appeal be dismissed with costs to the Respondent as the same is without merit.

Submissions of the Parties 11. In its Written Submissions dated 30th January, 2023 and filed on 31st January, 2023, the Appellant has raised six issues for determination:

i. Whether the Appellant‟s Notice of Objection dated 19th May 2022 stood allowed by operation of Section 51(II) of the TPA following lapse of sixty (60) days and the purported Objection Decision issued by the Respondent on 21st July 2022 is illegal and should be expunged. 12. On this issue, the Appellant submitted that it issued its notice of objection on 19th May 2022 and that he Respondent had until 18th July,2022 to either request for information from the Appellant, in the absence of which it ought to have issued its Objection decision by then pursuant to Section 51(II) of the TPA. The Respondent‟s Objection decision issued on 21st July, 2022 was therefore invalid and that the Appellant‟s notice of objection dated 19th May 2022 was deemed to have been allowed by operation of the law.

13. The Appellant cited the decision in Republic v Kenya Revenue Authority Ex- parte M-Kopa Kenya Limited (2018) eKLR where the High Court stated as follows:“In this case, the applicant had clearly made what was in substance an objection as envisioned under section 51 of the Tax Procedure Act, 2015. Accordingly the Respondent was required to make a decision in respect thereof within sixty (60) days under section 51 (II) of the said Act. As the Respondent defaulted in making a determination thereon within the prescribed time, the said objection was declared to have been allowed.”

ii. Whether the Respondent „s Assessment for the year 2015 was time barred. 14. The Appellant submitted that the Respondent‟s assessment was delivered vide a demand letter dated 22nd April 2019. It stated that as pursuant to Section 31(4)(b) of the TPA the Respondent is barred from assessing the Appellant to taxes for the year 2015. That the said Section provides:“The Commissioner may amend an assessment –a.In the case of gross or wilful neglect, evasion of fraud by, or on behalf of the taxpayer, at any time; orb.In any other case, within five years of –i.For a self –assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates….”

15. The Appellant submitted that it filed its self-assessment return for the year ending 31st December 2015 on 30th June 2016. Therefore pursuant to Section 31(4)(b) of the TPA, the five year period lapsed in June 2021. It follows therefore that having neither pleaded nor proven fraud in the instant Appeal, the Respondent is statutorily barred from assessing and /or demanding from the Appellant tax amount of Kshs 11,376,100. 00 for the 2015 year of income.

16. The Appellant cited the Tribunals holding in the case of Bachu Chahagrilal Shah v Commissioner of Domestic Taxes, Appeal No. 501 of 2019 where it was stated that:-“The law requires that amendment of self-assessments by the Respondent should be confined to five years for a self-assessment, from the date that the self –assessment taxpayer submitted the self- assessment return to which the self-assessment relates, except in cases of wilful neglect evasion, or fraud by or on behalf of the taxpayer. The Appellant filed its last return in 1999 the Respondent ought to have raised the amended assessment latest by the year 2005, which it failed to do. Moreover, the Respondent had neither alleged nor proved any form of wilful neglect, fraud or evasion by, or on behalf of the Appellant….”

iii. Whether the Respondent erred in law and in fact in deeming non-revenue bank deposits as taxable rental income without due regard to explanations and reconciling items and documents provided by the Appellant during the audit exercise. 17. On this issue, the Appellant submitted that during the assessment period, it had only two revenue streams namely, rental income and educational /school income and that the income declared in its tax returns during the assessment period was the actual and correct income earned by the Appellant and the same was supported by the relevant documents that were availed to the Respondent.

18. The Appellant therefore averred that the Respondent had no basis to apply alternative methods in determining the Appellant‟s income position during the assessment period since information was readily available to determine as much. It averred further that even in the event that the application of the alternative method by the Respondent in the determination of the Appellant‟s income during the assessment period was to be entertained, the same failed the application tests. The Appellant relied on the Tribunals holding in Wilken Telecommunications Limited vs Commissioner of Domestic Taxes, TAT Appeal No.195 of 2021 where the Tribunal set down the principles that should guide the Respondent in employing alternative and indirect methods of assessing a taxpayer‟s estimated tax liability.

iv. Whether the Respondent was justified in disallowing expenses incurred by the Appellant on wages and salaries during the assessment period. 19. The Appellant submitted that since the impugned salaries and wages were paid to the Appellant‟s employees during the assessment period, the costs incurred on the salaries and wages were incurred by the Appellant wholly and exclusively for purposes of generating its rental income and that in support of the incurrence of the salary expense it availed the Respondent with a reconciling analysis and information evidencing that the Appellant had employees to whom it paid salaries that were below the taxable threshold. The Appellant relied on Section 15 (1) (2) of ITA that guides on the deductibility of expenses incurred in the generation of rental income. That the said Section provides as follows:“For the purposes of ascertaining the total income of any person for a year of income there shall, subject to Section 16 of this Act, in such year of income which is expenditure wholly and exclusively incurred by him in the production of that income….”

20. The Appellant therefore submitted that the expenditure incurred on salaries and wages paid to its employees during the assessment period was necessary for the furtherance of the Appellants business and expenses thereon are fully deductible expenses.

v. Whether the Respondent was justified in demanding VAT on alleged variances obtained from adjustment of revenue on account of non-revenue bank deposits and other reconciling items which did not constitute VAT- able income without due regard to explanations and documents provided by the Appellant during the audit exercise. 21. On this issue, the Appellant relies on its submissions made under issue three above. Further that the Respondent failed to apportion the school income which is exempt from VAT vis-à-vis the commercial rental income. The Respondents VAT assessment is therefore overstated and should be vacated in its entirety.

vi. Whether the Respondent was justified in demanding PAYE on teachers housing despite the fact that the housing accorded to the teachers was not an employment benefit but instead, a statutory obligation. 22. On this issue the Appellant submitted that the housing accorded to its teachers do not amount to an employment benefit since it is a statutory obligation under Section 50(3) of the Basic Education Act, which obligates the Appellant to provide housing to its members of staff which include an in-house nurse and supervisory teaching staff. The same can therefore not be considered an employment benefit but is in compliance of a mandatory legal requirement for boarding schools where learners must be under supervision at all times. That the Respondent therefore failed to consider that the teachers‟ quarters cannot be rented out to the general public and are therefore not available to let in the open market and therefore cannot have any rental market value. The assumed amount of Kshs 12,000. 00 per unit is therefore baseless hence the Respondent‟s PAYE demand of Kshs 6,480,000. 00 should be vacated in its entirety.

23. In its Written Submissions dated 6th January, 2023 and filed on 7th March, 2023 the Respondent has also raised six (6) issues for determination as follows:

i. Whether the Respondents Objection Decision dated 21st July, 2022 is valid 24. On this issue the Respondent refuted the Appellant‟s assertion that the Objection decision was issued out of time by submitting that during the period there were three public holidays viz; Labour day, 1st May, 2022, Madaraka, 1st June, 2022 and Idd-ul-Adha, 11th July, 2022. It submitted further that these days are excluded days in the computation of time and as such, the Objection Decision was proper and was not made outside the statutory sixty days.

ii. Whether the Respondent properly assessed for 2015 25. The Respondent also relied on Section 31 (4) of the TPA and submitted that its preliminary finding was made vide a letter dated 8th June, 2021 and an amended assessment issued on 22nd April, 2022. As such the five years run from the date the Appellant filed the returns. According to the Respondent, the Appellant‟s returns were filed on 25th April 2018. The Respondent therefore submitted that both the Preliminary Finding of 8th June, 2021 and the Amended Assessment of 22nd April, 2022 were within the statutory timeline.

iii. Whether the Respondent correctly applied the banking method in arriving at the Assessments 26. The Respondent submitted that Section 31 of TPA empowers it to amend an assessment from the available information and to the best of its judgement and that the banking method is particularly useful if an analysis of bank account and a taxpayer‟s cash expenditure indicates a likelihood of undeclared income. To buttress its position, the Respondent relied on the case of Bachmann v. The Queen 2015 TCC 51 in which the Court stated that:-“This Court has recognised that in an appropriate case a bank deposit analysis is an acceptable method to compute income.”

27. The Respondent also submitted that Section 23 of TPA obligates the taxpayer to maintain documents and records which would enable the ascertainment of his tax status. It stated further that the Appellant failed to provide documents even at this Appeal to explain the deposits which would have enabled the Respondent determine the Appellant‟s tax status. It was therefore justified in relying on the information in its possession including the banking method to make the assessment.

iv. Whether the Respondent correctly disallowed the unsupported wages and salaries claimed during the period in the Income Tax Returns: 28. On this issue, the Respondent submitted that the Appellant failed to provide Schedules of employees whose payments were alleged to be below the taxable PAYE threshold and that the Appellant has referred the Tribunal to some document which they call the summary of Journal entries. However, the Respondent submitted this is neither a document of engagement nor payment of the alleged casual employees. It stated further that a payslip and bank payment evidence would have demonstrated this.

29. To buttress its position that pleadings must be supported by evidence, the Respondent relied on several cases one of which is CMC Aviation Ltd vs Cruisair Ltd (No.1)(1978) KLR 103;(1976-80) 1 KLR 835 where Madan J (as he then was) stated as follows:“Pleadings contain the averments of the parties concerned. Until they are proved or disapproved, or there is an admission of them or any of them, by the parties, they are not evidence and no decision could be founded upon them. Proof is the foundation of evidence. Evidence denotes the means by which an alleged matter of fact, the truth of which is submitted for investigation. Until their truth has been established or otherwise, they remain un-proven. Averments in no way satisfy, for example, the definition of “evidence” as anything that makes clear or obvious, ground for knowledge, indication or testimony, that which makes truth evident, ore renders evident to the mind, that it is truth”

30. The Respondent asserted that the Appellant failed to discharge its burden of proof as prescribed under Section 56(1) by failing to provide documents to counteract the assessment. In this regard, the Respondent submitted that it was correct in using its best judgement to charge income tax. According to the Respondent, the Appellant ought to have provided proof of engaging the persons below PAYE threshold and also proof of payment. The Respondent asserted therefore that it was right in disallowing the variance claimed as wages and salaries expenses as against income.

v. Whether the Respondent was correct in bringing to tax, the variance between the income tax Assessment and Value Added Tax. 31. The Respondent submitted that in order to determine whether the correct turnover and sales were declared for Income Tax and VAT purposes, it compared the turnover on rental income declared in the income tax returns against the vatable sales declared in the VAT returns which established a variance of Kshs 35,001,975. 00 in the sales declared in the years 2015 and 2017 indicating that the Appellant had underdeclared the VAT sales.

32. The Respondent averred further that data from the Jaspsersoft system was also at variance with the sales declared in the Appellant‟s VAT returns of Kshs 82,065,82600. It stated that adjustments were also undertaken for the directors and related party deposits amounting to Kshs 60,590,650. 00, rent deposits amounting to Kshs 19,121,745. 00 and school‟s caution money of Kshs 11,271,700. 00. It submitted that it applied the best judgement and the information in its possession in arriving at the corrected taxable income.

33. To buttress its argument, the Respondent relied on the holding in the case of Commissioner of Domestic Taxes v Structural International Kenya Ltd (Income Tax Appeal No. E089 of (2020) (2021) KEHC 152 (KLR) where the High Court held at Paragraph 48:-“For the avoidance of doubt, the Tribunal is reminded that in matters the issue is supply of goods, be it for VAT purposes or Corporation tax, the burden is always on the trader/taxpayer to show that the documentation set out in the statute and in which he relies on arose out of a commercial transaction, period. If additional documents, which would be reasonably expected to be in his possession is requested for to verify the alleged transactions, he should produce the same to the Commissioner. This is what is expected of a keen and diligent trader.”The Respondent submitted therefore that it was justified in treating the said monies as taxable income in the absence of any documentary evidence from the Appellant to controvert the same.

vi. Whether the Respondent correctly brought to charge the Housing allowance 34. On this issue, the Respondent submitted that Section 5(3) of the ITA provides that where the employer houses the employee, then the allowance is market value of the houses. It submitted further that based on the location and six of the sighted houses, it estimated the market value at Kshs 12,000. 00 per unit. The Respondent stated that in the absence of any counter claim by the Appellant, no adjustments can be made in computation of housing benefit.

35. The Respondent relied on the following cases to buttress its argument;a.Motex Knitwear Ltd v Gopitex Knitwear Mills Limited Nairobi (Milimani) HCC No. 834 of 2002b.Trust Bank Limited vs Paramount Universal Bank Ltd & Others Nairobi (Milimani) HCCS No.1243 of 2001

Issues for Determination 36. Having considered the parties‟ pleadings, documentation availed and the submissions, the Tribunal is of the considered view that this Appeal distils into four (4) issues for determination:a.Whether the Respondent‟s Objection Decision dated 21st July 2022 is proper in law.b.Whether the Respondent was justified in disallowing expenses in respect of wages and salaries paid during the period.c.Whether the Respondents assessment for the year 2015 was time barred.d.Whether the Respondent demand for tax was justified.

Analysis and Findings 37. Having established the four issues falling for its determination, the Tribunal will proceed to analyse them as hereinunder:(a)Whether the Respondent‟s Objection Decision dated 21st July 2022 is proper in law.

38. Both parties submitted on this issue as it was one of the grounds of Appeal raised by the Appellant. Further the Appellant filed a Notice of Preliminary Objection dated 2nd December, 2022 on the same issue. In its submission, the Appellant stated that it lodged its notice of objection on 19th May, 2022 and that the Respondent acknowledged receipt of the same on the same day by stamping it as received. According to the Appellant the Objection Decision issued on 21st July, 2022 was therefore invalid and of no consequence and cannot override the provisions of Section 51(1) of the TPA.

39. On its part, the Respondent argued that during the period between the lodging of the notice of objection on 19th, May, 2022 and the issuance of the Objection decision, there were public holidays celebrated namely labour day (1st May, 2022), Madaraka Day(1st June 2022) and Idd-Ul-Adha (11th July, 2022) and submitted that these days are excluded in the computation of time and as such the Objection decision was proper and within the statutory sixty days.

40. Section 51 (3) and 51 (II) of the TPA prescribes the threshold for a valid notice of objection and the timelines within which the Respondent ought to issue its Objection decision. The said Sections provide as follows:Section 51 (3):-“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 correct the decision and the reasons for the amendmentsb.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) andc.All the relevant documents relating to the objection have been submittedSection 51(II);-“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”

41. The Tribunal notes that the Appellant‟s notice of objection was lodged on 19th May, 2022while the Objection decision was made on 21st July, 2022 which was three (3) days outside the statutory timeline of sixty days envisaged by Section 51(11) of the TPA.

42. The Respondent has attempted to argue its position by justifying the lateness by stating that there were three public holidays between the period 19th May, 2022 to 21st July 2022. The Tribunal notes that even on this limb the Respondent‟s argument would fail as one of the holidays it has indicated which is 1st May, 2022 comes earlier than 19th May, 2022.

43. The Tribunal observes that the wording of Section 51 (II) of the TPA is couched in mandatory terms and that nowhere in the Section has it mentioned any consideration for public holidays. It is therefore an exercise in futility for the Respondent to suggest an alternative meaning to the statute.

44. The issue of validity of an objection decision was upheld in the case of Equity Group Holding Limited v. Commissioner of Domestic Taxes (Civil Appeal E069 & E025 of 2020 where the High Court held at paragraphs 55 and 60 that compliance with Section 51(II) of TPA, is mandatory, stating as thus;-55. “The word “shall” when used in a statutory provision imports a form of command or mandate. It is not permissive, it is mandatory. The word shall in its ordinary meaning is a word of command which is normally given a compulsory meaning as it is intended to denote obligation. The Longman Dictionary of English Language states that “shall” is used to express a command or exhortation or what is legally mandatory”60“Section 51 (II) of the TPA is couched in peremptory terms. Having correctly found that the decision was made after the expiry of 60 days, the TAT had no legal basis to proceed as it did and to invoke article 159 (2) (d). First there was no decision at all. The decision had ceased to exist by operation of the law. Second, the provisions of section 51 (II) (b) had kicked in. The objection had by dint of the said provision been deemed as allowed. Third, the TAT had no discretion to either extend time or to entertain the matter further. Fourth, discretion follows the law and tribunal cannot purport to exercise, discretion in clear breach of the law.”

45. In view of the foregoing, the Tribunal finds that the Respondent‟s Objection decision dated 21st July, 2022 was issued out of the statutory time and was to that extent not proper in law. The legal effect thereof being that the Appellant‟s notice of objection was deemed as allowed by operation of law in pursuant to Section 51(11) of the TPA.

46. Having established that the Respondent‟s Objection decision was invalid, the Tribunal will not proceed with the other issues as the same have been rendered moot.

Final Decision 47. The upshot of the foregoing analysis 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 dated 21st July, 2022 be and is hereby set aside.c.Each party to bear its own costs.

48. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 18TH DAY OF AUGUST, 2023ERIC NYONGESA WAFULA - HAIRMANDELILAH K. NGALA - MEMBERCHRISTINE A MUGA - MEMBERGEORGE KASHINDI - MEMBERABDULLAHI M. - MEMBERSPENCER S. OLOLCHIKE - MEMBER