[2023] KETAT 585 (KLR)

Shelterbuilt Company Limited v Commissioner of Domestic Taxes (Appeal 357 of 2022) [2023] KETAT 585 (KLR) (29 June 2023) (Judgment)

Neutral citation: [2023] KETAT 585 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 357 of 2022

RM Mutuma, Chair, RO Oluoch, EN Njeru, D.K Ngala & EK Cheluget, Members

June 29, 2023

Between

Shelterbuilt Company Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act of the Laws of Kenya, situated in Nairobi, and is in the construction business.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Authority Act, and the Kenya Revenue Authority is charged with the mandate of assessment, collection, receipting, and accounting for all tax revenue, and the administration and enforcement of all the relevant tax statutes set out in the Schedule to the Act.

3. The Appellant is in the construction industry whereon it engages in the construction of projects on behalf of its clients.

4. The dispute emanated from VAT Automated Audit [VAA] inconsistency exercise, which produced system based additional assessments for the period of February 2019 due to the inconsistencies in the Appellant’s purchaser declarations and those of its suppliers.

5. The Respondent issued an assessment order to the Appellant dated 15th November 2019 requiring it to pay the sum of Kshs 1,659,863. 00 being VAT arrears

6. The Appellant objected to the additional assessments on 27th November 2019 and the Respondent sent it a request for additional documents to the Appellant to enable it verify the purchases.

7. The Appellant responded vide its letter dated 29th January 2020 but did not avail all the requested documents like purchase invoices but only produced bank statements for the month of February 2018.

8. The Respondent by a letter dated 26th April 2021 invalidated the Appellant‘s objection for failure to comply with Section 51(3)c of the TPA with regard to production of documents, and thereby confirmed the assessment in the sum of Kshs 778,597. 65 against the Appellant on the basis of the partial documents provided. The Respondent also sent a demand to the Appellant to settle the principal amount and interest outstanding.

9. The Appellant being dissatisfied with the Respondent’s objection decision filed the Appeal herein with the Tribunal on 14th April 2022.

The Appeal 10. The Appellant filed the Appeal herein on the 14th April 2022 and set out the following grounds of appeal;i.That the Respondent erred in fact and law by irregularly and unprocedurally issuing a demand notice not supported and or preceded by lawful objection decision.ii.That the Respondent erred in fact and in law by issuing the Appellant with the impugned demand notice contrary to Section 51(11) of the Tax Procedures Act, 2015, which provides that an objection shall be allowed where the Respondent fails to issue an objection decision within 60 days of the objection.iii.That the issuance of the impugned demand notice in the manner done by the Respondent amounts to an abuse of its powers, and is arbitrary and unlawful.

11. The Appellant wherefore by reasons aforesaid has prayed to the Tribunal to allow its Appeal and set aside the demand for tax arrears in the sum of Kshs 2,210,436. 00 dated 4th October 2020.

The Appellant’s Case 12. The Appellant has set out its case in the Statement of Facts filed on the 14th April, 2022 with the documents annexed thereto and the Appellant’s written submissions filed on 12th October 2022.

13. The Appellant stated that the Respondent issued it with an assessment dated 15th November 2019 requiring it to pay the sum of Kshs 1,659,863. 00 being VAT arrears, of which the Appellant objected to vide its letter dated 27th November 2019.

14. That thereafter vide a letter dated 24th December 2019, the Respondent requested the Appellant for additional supporting records, to wit; proof of purchase against disallowed invoices, evidence of delivery of goods and services and payment for the same and, details of the Appellant as well as those of its supplier ‘s bank account, pay bill, and /or till number through which payment is made.

15. The Appellant stated that it proceeded to submit the invoices that were flagged by the Respondent as requested, but the Respondent did not proceed to issue the objection decision, and all remained well and quiet.

16. The Appellant further stated that owing to the adverse business conditions occasioned by the Covid-19 pandemic, the Appellant’s business activities and operations slowed down considerably.

17. The Appellant stated that by a letter dated 4th October 2020, the Respondent issued a demand notice requiring the Appellant to pay tax arrears in the sum of Kshs 2,210,436. 00, which alarmed the Appellant prompting them to seek clarity on the issue amid protesting the demand.

18. The Appellant asserted that due to the prevailing business conditions obtaining most of year 2020 and early 2021, the Appellant was not in a position to obtain or retain legal counsel to advise it on the tax dispute.

19. It is the submission of the Appellant that the said demand notice dated 4th October 2020 is contrary to the procedure set out in Section 51(8 & 9) of the TPA, that requires the Respondent to issue an objection decision within 60 days of the Appellant’s objection notice dated 27th November 2019.

20. The Appellant submitted that the Respondent erred in fact and in law by failing to issue objection decision within 60 days and or issuing demand notice on 4th October 2020, after 60 days of the Appellant ‘s objection dated 27th November 2019 and or 29th January 2020 when the Appellant lastly furnished the Respondent with documents.

21. The Appellant submitted that Section 51(11) of the TPA provides that ; “ Where the Commissioner has not made an objection decision within sixty days from the date that the taxpayer lodged a notice of the objection, the objection shall be allowed .”

22. The Appellant contended that by virtue of the forgoing provision, there is a statutory capping on the time within which the Respondent is allowed to make an objection decision. That it is clear that the Respondent failed to make the objection within the allowed 60 days, or make any objection decision at all.

23. The Appellant further averred that the Respondent went ahead in total disregard of the law and issued the impugned demand notice on 4th October 2020, after ten months had lapsed from the 7th November 2019, when the Appellant lodged the notice of objection, and or after eight months had elapsed after the Appellant lastly furnished additional documents to the Respondent on 29th January 2020.

24. The Appellant also submitted that the Respondent erred in law and fact by irregularly and unprocedurally issuing a demand notice not supported and or preceded by a lawful objection decision, and the issuance of the notices in the manner done by the Respondent also amounts to an abuse of its powers and functions. That Section 51(8) provides that:- ,”where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, and the Commissioner ‘s decision shall be referred to as the objection decision.”

25. That in that regard the Appellant failed totally to issue an objection decision after the Appellant had lodged its objection notice on 27th November 2019 and, submitted further information, upon request by the Respondent. The Appellant cited and relied on the following cases ; -a.Sampesa Agency Ltd -vs- Commissioner of Domestic Taxes (TAT No. 2020),b.Step-up Holdings (K) Ltd -vs- Commissioner of Domestic Taxes TAT No. 42 of 2018c.Vivo Energy Kenya Ltd -vs- Commissioner of Customs and Boarder Control, KRA & Anor (2020) eKLR.

26. The Appellant also submitted that the Respondent is enjoined in mandatory terms under Section 51(4) of the TPA to inform the taxpayer immediately of any invalidity of its objection notice, the operative word being “immediate”, it supposes that the Respondent fails to issue the Appellant with objection decision, or inform them of any invalidity of the objection notice, issuing a demand notice instead, this violates the provisions of Section 51 of the TPA. The Appellant cited in support the case of, ESL Forwarders Ltd -vs- Commissioner of Domestic Taxes TAT Appeal No. 255 of 2020.

27. The Appellant further relied on the case of Republic -vs- Kenya Revenue Authority Ex Parte M-Kopa Kenya Ltd [2018] eKLR, where it was stated that;- “ …the Respondent was required to make a decision in respect thereof within sixty( 60) days under section 51(11)of the said Act. As the Respondent defaulted in making a determination thereon within the prescribed time, the said objection was deemed to have been allowed “.

28. The Appellant therefore submitted that the Respondent ‘s failure to consider the Appellant notice of objection within the sixty days statutory period rendered the demand notice invalid, as the objection notice was automatically allowed by operation of the law.

29. It was further the submission of the Appellant that the Respondent arbitrary, maliciously and out of the blue issued the demand notice notwithstanding the fact that the Appellant had been filing accurate returns and paying the requisite taxes as evidenced by its willingness to be forthcoming with its financial records and thus, the impugned action was an abuse of power.

30. The Appellant submitted that the Respondent ‘s actions and or omissions amounted to illegality in law in view of Article 47 of the Constitution of Kenya and section 51 of the TPA.

31. By reason of the foregoing submissions the Appellant prayed that the Tribunal allows the Appeal and sets aside the demand notice dated 4th October 2020.

The Respondent’s Case 32. The Respondent has set out its response to the Appellant‘s case on its Statement of Facts filed on 16th November 2022 and written submissions filed on 216th November 2022.

33. The Respondent stated that the dispute giving rise to this Appeal resulted from VAT Automated Audit (VAA) inconsistency exercise, which produced system based additional assessments for the period February 2018 due to the inconsistencies in the Appellant’s purchaser declarations and those of its suppliers. The Respondent generated additional assessments in the sum of Kshs 1. 659,863. 00 for the aforementioned duration. The Appellant duly objected to the additional assessments on 27th November 2019, and the Respondent sent a request for additional documents to the Appellant to enable it verify the purchases. The Appellant responded vide its letter dated 29th January 2020, but vide the said response it did not avail all requested documents like invoices, but only provided bank statements for the Month of February 2018.

34. The Respondent further stated that vide its letter dated 26th April 2021, which is exhibited on the Statement of Facts and marked as “KRA 3”, it confirmed the assessment in the sum of Kshs 778,597. 65 against the Appellant based on the partial document provided, and thereafter sent a demand to the Appellant to settle the outstanding principal taxes and interest.

35. The Respondent stated that the confirmed assessment of Kshs 778,597. 65 is valid and should be upheld by the Honourable Tribunal for the following reasons :-a.The Appellant’s VAT objection to the assessment for the month of February 2018 was rejected on the basis that the Appellant did not provide sufficient supporting documents.b.The Appellant’s objection notice was invalidated under Section 51(4) of the Tax Procedures Act as it did not meet the requirements of Section 51(3)c of the said Act.c.The Appellant was clearly notified of the assessment and furnished with the information relating to the amounts assessed, penalties imposed the interest accrued, the period the assessments relate to, the due dates for the taxes and the manner in which it could object as per Section 51(2) of the TPA.d.The Appellant objected to the assessment and only provided copies of the bank statement to support its objection, and the objection was partly rejected for lack of adequate supportive documents with the confirmed assessment revising the initial assessment to Kshs 778,597. 65. e.Contrary to the Appellant’s averments, the Respondent’s demand was rendered in accordance with the law.

36. The Respondent submitted that given the aforetasted reasons, it place reliance on Section 56 of the TPA which provides thus;“In any proceedings under this part , the burden shall be on the taxpayers to prove that a tax decision is incorrect”.

37. To buttress the submission, the Respondent cited the case of, Digital Box Ltd -vs- Commissioner of Investigations & Enforcement TAT No, 115 of 2017 , where the Tribunal reiterated the holding of Madan, J. in CMC Aviation Ltd -vs- Cruise Air Ltd (1978) KLR 103, thus:“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 is proven. Until their truth has been established or otherwise , they remain unproven.”

38. The Respondent therefore submitted that it was justified in its decision to disallow the objection and proceed to confirm the assessments in the sum of Kshs 778,597. 65 as there was no valid objection by the Appellant by dint of the provisions of Section 51(3) c of the Tax Procedures Act, which provides that:-“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) , if (c) , all the relevant documents relating to the objection have been submitted,”

39. The Respondent submitted that based on the material presented before the Tribunal the Appellant failed to discharge its burden of proof as required under statute therefore invalidating its objection to the assessment.

40. The Respondent further submitted that the Appellant violated the provisions of Section 23 of the TPA, which requires taxpayers to maintain any document required under a tax law so as to enable the person’s tax liability to be readily ascertained.

41. The Respondent added that the documents that were sought are the regular documents in the ordinary course of business, and are in possession of the Appellant.

42. The Respondent further submitted that it was evident that the Appellant failed to discharge its statutory obligation of furnishing the Respondent with the necessary documents as required by law, and the Respondent was justified in confirming the additional assessment in the absence of any evidence to the contrary and was according to the available information and to the best of the Commissioner‘s Judgment. The Respondent placed reliance on the case of Primarosa Flowers Ltd -vs- Commissioner of Domestic Taxes [2019] eKLR.

43. The Respondent therefore submitted that its decision was valid as the confirmed tax liability was still owing to the Respondent and the enforcement by way of demand notices was valid and proper in law.

44. The Respondent by reason of the foregoing submissions prayed to the Honourable Tribunal to find the Appeal herein devoid of merit and dismiss the same with costs.

Issues for Determination 45. The Tribunal having carefully considered the pleadings, the evidence adduced and the submissions made by the parties, is of the view that the Appeal herein distils into two issues as follows:-i.Whether there is a valid objection decision?ii.Whether the Respondent’s assessment was justified?

Analysis and Findings i. Whether there is a valid objection decision? 46. The Appellant lodged an objection to the Respondent’s assessment vide its letter dated 27th November 2019, and the Respondent requested for additional supporting documents vide its letter dated 24th December 2019, notably proof of purchases against the disallowed invoices, evidence of delivery of goods and services and payment for the same, as well as the details of its bank accounts, as well as the suppliers’ bank accounts, pay bill or mobile till through which the payments were made. This additional information was to facilitate the review of the Appellant’s objection notice to the said assessment.

47. The Appellant responded to the said request for documents on the 29th January 2020 and submitted the available additional records, with an indication that it was in the process of retrieving the other documents requested.

48. After the Appellant ‘s response dated 29th January 2020, to the request by the Respondent for additional documents, there was no further communication between the two parties until 4th October 2020 when the Respondent issued the Appellant with a seven day demand notice to pay the sum of Kshs 2,210,436. 00 arising out of the initial assessment of Kshs 1,659,863. 00 which the Appellant had objected to.

49. On 26th April 2021, the again wrote to the Appellant through a notice of invalidation of objection and stated that since the Appellant did not avail all the requested documents, the Respondent had no choice but to confirm the assessment in the sum of Kshs 778,597. 65 and demanded payment of the said amount vide the said letter.

50. Thus, the Respondent submitted that the Appellant’s objection does not meet the threshold as provided for under Section 51[3] of the Tax Procedures Act, and therefore not valid.

51. The contradictions in the Respondent’s two letters cited hereinabove are a bit of a surprise though, coming from the Respondent. The letters appear as though they were plucked out of entirely two different files with different subject matters. The validity of the objection decision is thereby contested on the basis of the two letters.

52. The Appellant has contested the Validity of the Respondent ‘s objection decision and has asserted that the Respondent erred in fact and law by failing to issue the objection decision within 60 days, and /or by issuing a demand notice on 4th October 2020, way after the statutory period of 60 days had lapsed, after the Appellant’s notice of objection dated 27th November 2019 and / or on 29th January 2020 when the Appellant lastly furnished the Respondent with the requested documents.

53. Section 51 of the Tax Procedures Act, 2015 provides as follows:-“(8)Where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, and the Commissioner ‘s decision shall be referred to as an ‘objection decision’.(9)The Commissioner shall notify in writing the taxpayer of the objection decision and shall take all necessary steps to give effect to the decision including , in the case of an objection to an assessment, making an amended assessment.(10)An objection decision shall include a statement of findings on the material facts and the reasons for the decision.(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of –a.the notice of objection, orb.any information the Commissioner any require from the taxpayer failure to which the objection shall be deemed to be allowed.”

54. It is clear from the literal reading of the above provision that there is a statutory capping of the time within which the Commissioner is allowed by law to render an objection decision, from the time of either filing of the objection notice, or submission of any requested records and as it is has been often stated, statutory timelines are not pious platitudes.

55. The Appellant filed its notice of objection on the 27thNovember 2019, and the Respondent requested for additional supporting documents on 24th December 2019 to facilitate the Respondent’s review of the notice of objection to which the Appellant responded and submitted documents on 29th January 2020. There was no subsequent correspondence between the parties or exchange of further documents/ records / information.

56. Given the foregoing statutory timelines, the Respondent was legally obligated to render an objection decision latest by 31st March 2020. However, eight months later from this date, instead of the objection decision, the Respondent issued a demand notice to the Appellant dated 4th October 2020, demanding payment of the amount in the initial assessment together with penalty and interest amounting to Kshs 2,210,436. 00 within seven (7) days of the date of the demand. As at the date of this demand, no objection decision had been rendered by the Respondent inspite of the receipt of the notice of objection and submission of additional documents by the Appellant.

57. The Tribunal has had the benefit of reviewing the authorities submitted by the parties and the holding thereon, notably;a.ESL Forwarders Ltd -vs- Commissioner of Domestic Taxes TAT 255/2020b.Republic -vs – Kenya Revenue Authority Ex parte M-Kopa Kenya Ltd (2018) eKLR.c.Sampesa Agency Ltd -vs- Commissioner of Domestic Taxes TAT 271 of 2020. d.Step up Holdings Kenya Ltd -vs- Commissioner of Domestic Taxes TAT 42 of 2018. e.Vivo Energy Kenya Ltd -vs – Commissioner of Customs and Boarder Control, KRA, & Anor (2020) eKLR.

58. In light of the foregoing the Tribunal finds that the Respondent ‘s failure to consider the Appellant’s notice of objection within sixty days and render an objection decision thereon, rendered the objection decision allowed by operation of the law in accordance with Section 51(11) of the Tax Procedures Act.

59. In addition to the demand notice, interestingly enough the Respondent purported to issue an objection invalidation notice to the Appellant dated 26th April 2021, almost after one-year period had lapsed after the last date of exchange of additional documents. In the said letter, annexed by the Respondent as “KRA3”, the Respondent cited Section 51(3) c for the invalidation and stated as thus: -“Your objection has been invalidated under section 51(4) since it does not meet the requirements of section 51(3) c of the TPA. The total additional assessments on input tax for the period February 2018, amounting to Kshs 778,597. 65 remains due and payable. The outstanding tax shall therefore be forwarded to our Enforcement Division for recovery.”

60. This letter marks a complete contrast with the earlier letter of demand dated 4th October 2020. Nevertheless, the Tribunal shall restrict its review to the timing of the invalidation notice.

61. Section 51(4) of the TPA under which the invalidation notice has been issued provides as thus:-“Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall immediately notify the taxpayer in writing that the objection has not been validly lodged.’’

62. A cursory reading of this provision, leaves no doubt in the Tribunal’s minds that the Commissioner is enjoined in mandatory terms to notify the taxpayer immediately of any invalidity in its notice of objection. The operative word herein is ‘’immediate”, which means without any delay or instantly. This therefore connotes in essence that the notification is not tethered to the sixty days requirement for rendering an objection decision. It ought to be instantly the triggering action is occasioned.

63. In the circumstances of the instant case, the Appellant summited the last response with the documents requested by the Respondent on the 29th January 2020, it is therefore expected that with a day or so thereafter, the Respondent would have determined whether the requirements of Section 51(3) c of the TPA had been met, and notify the Appellant immediately, without further ado. But to wait one year down the road and then purport to invalidate an objection notice, after issuing a demand, a year earlier, for a completely different tax amount without considering the Appellant’s additional documents, is clearly an extremity and unacceptable arbitrariness.

64. In view of the foregoing, the Tribunal finds that the Respondent ‘s notice of invalidation of objection dated 26th April 2021 was issued in contravention of the provisions of Section 51(4) of the Tax Procedures Act and is therefore invalid.

65. In light of the findings and holdings herein, the Tribunal finds and determines that there was no valid objection decision rendered by the Respondent, and consequently its demand notice as issued to the Appellant is rendered invalid.

ii. Whether the Respondent ‘s assessment was justified 66. The Tribunal having found and determined that there was no valid objection decision, renders the second issue moot and the Tribunal will therefore not procced to review and determine the issue.

Final Decision 67. The upshot of the foregoing is that the Appeal succeeds and the Tribunal accordingly proceeds to issue the following Orders :-a.The Appeal be and is hereby allowed.b.The Respondent’s demand notice for tax arrears of Kshs 2,210,436. 00 dated 4th October 2020 be and is hereby set aside.c.The Respondent’s Notice of Objection Invalidation dated 26th April 2021 in the sum of Kshs 778,597. 65 be and is hereby set aside.d.Each party to bear its own costs.

68. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 29TH DAY OF JUNE, 2023. ………………………….ROBERT M. MUTUMACHAIRPERSON………………………..RODNEY O. OLUOCH ELISHAH N. NJERUMEMBER MEMBER…………………………DELILAH K. NGARA EDWIN K. CHELUGETMEMBER MEMBER